Subprime Homsick Blues

James Surowiecki looks at the subprime mess:

The backlash against the subprime lenders is understandable, since their business practices were often reckless and deceptive. Instead of responding to the slowdown in the housing market by cutting back their lending, they pressed their bets—last year, six hundred billion dollars’ worth of subprime loans were issued. Many of the lenders hid their troubles from investors, even as their executives were dumping stock; between August and February, for instance, New Century insiders sold more than twenty-five million dollars’ worth of shares. And there’s plenty of evidence that some lenders relied on what the Federal Reserve has called “fraud” and “abuse” to push loans on unwitting borrowers.
For all that, “predatory lending” is a woefully inadequate explanation of the subprime turmoil. If subprime lending consisted only of lenders exploiting borrowers, after all, it would be hard to understand why so many lenders are going bankrupt. (Subprime lenders appear to have been predators in the sense that Wile E. Coyote was.) Focussing on lenders’ greed misses a fundamental part of the subprime dynamic: the overambition and overconfidence of borrowers.

It’s seems that subprime lenders are in a never-ending cycle. If their standards are too loose, they’re accused of being predatory. If their standards are too tight, then they’re accused of “redlining.”

Posted by on April 4th, 2007 at 9:37 am


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