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Originally Posted by Ironduke
I think it would be better for mortgage & credit card companies to cut rates on their sub-prime accounts. Better to collect a bit less interest than see millions of accounts default for a total loss.
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I'm not up to speed on the various proposals over the sub-prime mess and the analysis of them, but I found this synopsis of a study to be quite fascinating - essentially, the majority of the mess is probably due to "predatory borrowing", i.e., fraud on the part of the borrowers.
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http://www.nytimes.com/2008/01/13/business/13view.htm
IT’S NOT JUST THE LENDERS There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.
Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter.
In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application, especially because unemployment in general has been low during the last two years.
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