Wednesday, July 30, 2008

Neither a Borrower or a Lender Be

I'm no big booster of the banking industry. They gave out a lot of unrealistic loans and packaged them into collateralized debt instruments. They sold off the ones they could and kept the ones they couldn't at virtually no cost to them, then used those to leverage even more debt. There were enough extra fees both paid by the borrower up front and folded into the loan itself to make that alone profitable enough to sell off the loans real cheap but the borrowers were not innocent victims and the criminality of the lenders does not make it so.

I know people who are going to lose their houses. They only come in two flavors. The first kind bought way more house than they could afford. They got loans for very little or nothing down. The payments were never amortized and often didn't even cover the interest accruing on the mortgage, making the principal, on which often high rates of interest are charged, larger with each passing month. These people never planned to keep the houses they purchased, their plan was simply to accrue equity in the house through rising market appreciation. They planned to then sell the house before the mortgage reset or the balloon payment was due. Many planned to do this in order to gain enough money to make a down payment on a more modest house, condo or even a mobile home that they could afford. The other flavor are those who purchased homes they could afford but got caught up in a vicious circle of refinancing in order to subsidize a lifestyle that they could not afford. In the end, they too owned a house on which they owed way more than they could afford to pay.

The borrowers and lenders are equally culpable. No one should be bailed out. The Republicans want to bail out the bankers. The Democrats want to bail out the borrowers. It looks like we are going to do both. It is reprehensible

No comments: