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In this case they are preying on the lenders, who don't really care because they are passing off the risk to someone else.
by jeffreyrogers 8y ago
In this case they are preying on the lenders, who don't really care because they are passing off the risk to someone else.
- mannykannot 8y agoThe issue is really who gets eaten. While the lender, or whoever ends up holding the loan, might get burned, it is very unusual for the borrower of a predatory loan to end up better off for it.
- WalterBright 8y agoIf I loan you money, and you don't pay it back, how do I gain?
- mannykannot 8y agoAs I said, the lender might get burned. OP appeared to be talking about trying to take advantage of predatory lenders, and my point is that the borrower would usually be harmed more by attempting to do so than the lender, whose business model can typically accommodate a fairly high default rate. Consider balloon mortgages, which are structured to encourage the borrower to pay all the interest, then, if they default on the final payment, the lender repossesses the property. In the lead-up to 2008, when prices all around were rising rapidly, repossession could look almost as attractive a proposition as getting the principal back, or possibly more so, and it made it easy to sell the risk in the secondary market.
- WalterBright 8y agoMy mortgage documents say that if my house is repossessed due to non-payment, and the lender sells the house, any value received that is in excess of the amount owed acrues to me, not the lender. There is no advantage to the lender in repossessing the house in a rising housing market.
- mannykannot 8y agoIn the post I was replying to, you were asking about whether there is a downside for the lender. As I mentioned, there are scenarios in which the lender does badly, but in this one, the lender gets what it wants, a stream of interest income followed by the return of principal. The borrower has, in effect, and probably inadvertently, flipped the house, but if you were doing that intentionally, you would be much better off selling the property rather than allowing it to be repossessed. Of course, someone facing a balloon payment he cannot afford is probably best advised to sell before repossession, but if that is not the situation he wanted to be in, it is likely a pyrrhic outcome at best. I suppose someone intending to flip a property might prefer a balloon mortgage if it has lower payments - financing flips is not something I know anything about - but that would seem to be a win-win situation, at least up to questions of risk. The important question with regard to so-called predatory lending is how things usually work out in practice.
- WalterBright 8y agoI am not seeing how a lender is better off lending money to people who cannot pay it back.
- mannykannot 8y agoA lender who makes an unsecured or insufficiently-secured loan to a person who makes no attempt to pay interest or return the principal, and has exhausted all means to collect on the debt, is indeed worse off than if he had kept the loaned amount in a risk-free asset (unless, perhaps, there is some compensating tax advantage, though I wouldn't know anything about that, and it seems unlikely that such opportunities would be widely available.)