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Thursday, January 17, 2013

'More Ideological Excuse Making for Bad Banks'

 Barry Ritholtz takes on:

...this bit of AEI silliness:

“And here I thought it was the borrower’s job to determine if he has the means to repay a loan.”

It used to be. Homebuyers would look at their income, assets, monthly cash flow, job security, debt outstanding and things like that to determine if the family could afford to own a home. The lender’s job was to perform adequate due diligence and protect against loss by requiring a down payment.

No. That is Wrong. It so wrong on so many many levels that I have to stop what I was going to be doing this morning and respond to this silliness instead:

1. Banks — not borrowers — are the ones who actually make the loan decision.

2. Banks have access to capital. Depositors give banks money (FDIC helps that) and banks also can tap the Fed for even more capital. The banks have obligation to all of these entities to adhere to good lending standards.

3. It is the banks job to determine credit worthiness. THAT IS WHAT THEY DO. If they do not care to be bother to make this determination, then perhaps they should consider something other than the money lending business as a vocation.

Left to themselves, most humans would borrow much more money than they can reasonably handle. This is not a political statement, it is an observation about Human Nature.

Banks and other credit sources know this — that is why they review income and FICO scores and past payment history and debt load and employment record and tax returns. It is to verify the credit worthiness of the applicant.

No, this isn’t an exercise in due diligence — “Hey, figure out what you can afford, and we will check your work for you.” That is not what maintaining Lending Standards means.

This is why the no doc, no credit check, liar loans were destined to fail. ...

He is discussing a column by Caroline Baum:

Further..., Ms. Baum could not help herself to bring up the usual bugaboos: “Without re-litigating the cause of the housing bubble — greedy bankers or government housing policy” — that’s because that debate is over, and the Peter Wallisons and Ed Pintos of the world overwhelmingly lost it.
The only reason to go back to that debate — as was done repeatedly in the column — is because the outcome of that disagrees with your ideology. The statement “Government housing policies caused the crisis” is enormously useful, however, as it signifies cognitive dissonance on the part of its proponent.

No matter how much evidence piles up against it, and there is presently a significant amount, they can't let go of the idea that the housing crisis was caused by the government trying to help poor people. That's not what happened, but the facts are a large blow to their ideology and they aren't about to admit that what they've been claiming is wrong.

    Posted by on Thursday, January 17, 2013 at 11:15 AM in Economics, Housing | Permalink  Comments (52)


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