Predatory lending practices

Generally, predatory lending practices refer to situations where the lender uses its superior knowledge or market power to defraud borrowers by charging them high interest rates, exorbitant fees, or by imposing upon them other onerous contract terms that purposely leave them worse off than if they had not taken out the loan.

Predatory lending practices were implicated in the subprime mortgage crisis of 2007 because many observers interpret interest-only (I/O), negative amortization (neg am), adjustable-rate (ARM), and a variety of other types of subprime mortgage as prima facie evidence of predation. Those mortgages were predatory and caused the crisis, the argument goes, ergo predatory lending practices caused the crisis.

In fact, subprime lending is not synonymous with predatory lending. The conflation is made primarily because subprime borrowers are at higher risk of being victimized. Any type of mortgage can be beneficial to a borrower who fully knows and understands the terms and conditions of the loan. A type of interest-only loan known as a "ground rent," for example, greatly aided artisans (small manufacturers) in late eighteenth and early nineteenth century Philadelphia and Baltimore.Similarly, ARMs make sense for borrowers who plan to move in a few years but wish to own rather than rent. Such mortgages become predatory when mortgage brokers trick or cajole borrowers into taking them in order to increase their commissions.

Predatory lending predated the housing bubble but the buoyant... Read more...

NINJA Dad Finance executive

In the autumn of 2006 I knew the gig was up. Two years out of college, my unemployed and I suspect then unemployable daughter was finally ready to leave the nest. Instead of flying into a rental, be it a small studio apartment or an old house brimming with other young ne'er-do-wells, she soared right into a house, a very nice quarter of a million dollar one no less. When I asked her why she wanted to buy, she said she did not want to "throw away" her money by renting, sought the income tax deduction (presumably when she had any to pay), and thought it a good investment because housing prices were going up so fast.

My daughter was, of course, a subprime borrower, one of the worst kinds -- a NINJA, or a borrower with No Income, No Job or Assets. The instrument was a 30-year interest-only mortgage with a so-called "silent second" to cover the down payment. Her plan was to take in boarders and to cover the rest of the rent from her sundry part-time jobs. She hasn't defaulted ... yet ... but periodically she calls crying her eyes out. Read more...