Predatory Borrowers

Barry Ritholtz, econoblogger extraordinaire, fired harshly at Tyler Cowen, econoblogger extraordinaire, on Sunday, with a blog entry originally entitled "Tyler Cowen, Apologist for Fraud?".

Ritholtz has since toned down the headline, but the substance of his criticism stands, and it's centered on one line of Cowen's, from his NYT column:

There has been plenty of talk about "predatory lending," but "predatory borrowing" may have been the bigger problem.

Ritholtz is convincing on the subject of mortgage originators' complicity in borrower fraud. Yes, those stated incomes might well have been exaggerated, but much if not most of the time they were only exaggerated because the mortgage salesman encouraged the borrower to lie.

Still, I don't agree with Ritholtz's conclusion that Cowen's statement is "utterly silly" and "misleading in extremis", and I certainly don't think that it's "utterly contemptible" to accuse the borrowers of fraud.

The last one's the easiest to deal with: borrowers who lied on their mortgage applications were guilty of fraud. Simple as that. Were they egged on by sleazy mortgage brokers? I daresay they were. But frankly it's silly for Ritholtz to delude himself that there was no fraud at all on the side of the borrowers.

As for the statement about "predatory borrowing", Cowen was basically just saying that there's a hell of a lot of blame to be spread around in this housing mess that we're in. And he specifically contrasted the actions of the borrowers with those of predatory lenders.

Now there was predatory lending going on in the subprime boom. Prime borrowers were talked into subprime loans, for instance - a clear case of lenders extracting much more money and value out of the borrowers than the borrowers needed to pay. Pensioners on fixed incomes were talked into refinancing their homes in order to reduce their mortgage payments, and the sleazy broker simply wouldn't mention that the mortgage payments could and would adjust upwards. These kind of deals were bad for the borrowers, shouldn't have been done, and constituted predatory behavior on the part of the originators.

But most subprime lending was not predatory. In many cases where a genuinely subprime borrower took out a mortgage on a house he couldn't afford with little or no money down, it is the borrowerwho is coming out ahead: consuming much more in the way of housing services than he will end up paying for. The lender, meanwhile, gets left with an enormous loss - which is not what normally happens in cases of predatory lending.

So, was "predatory borrowing" - ie, fraud by borrowers - more widespread than "predatory lending", where borrowers were fleeced by dodgy mortgage originators? It's entirely possible. Says Cowen:

I think the lenders are greatly at fault, as does anyone else with a fair mind. Pointing out additional faults elsewhere doesn't (and should not be understand as) subtracting from those faults. More generally, the point of my column was... not to provide a comprehensive survey of who was at fault in the mortgage crisis. I didn't even mention the regulators but clearly they are at fault too and of course you could lengthen the list of people at fault.

Southern California is full of borrowers who tried to get rich quick flipping property. It is they who helped fuel the speculative bubble, and they deserve their fair share of blame. I think that Cowen's right, on this one, and Ritholtz, although he has a fair point, is a little too shrill.