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You use the word "predatory" a couple times. What does that mean? These are contracts that are willingly entered into by the borrower, and the lender has a lo

You use the word "predatory" a couple times. What does that mean? These are contracts that are willingly entered into by the borrower, and the lender has a lot of incentive to ensure that the borrower can actually pay.

ceejayoz 8y ago
In some scenarios, the lender has more incentive to let someone make years of mostly-interest payments, then foreclose. An underhanded contract isn't going to be obvious to a borrower with a high school dropout's education level. Even your run-of-the-mill credit card contract is written to an eleventh grade reading level, on average.
gammateam 8y ago
It means the licensed lender has a higher standard to abide by and not take advantage of the borrowers needs Such as creating a claim on everything the borrower will ever have and turning them into a debt serf But hey maybe housing prices go up really really fast
soVeryTired 8y ago
The lender has incentive to ensure that the value of the debt is greater than the initial outlay. That could be via a steady stream of payments, or via a handful of repayments plus a repossession and resale of the property. If the loan originator thinks the latter is likely, I don't think it's unreasonable to call the loan predatory.
docker_up 8y ago
You should research what the predatory loans were during the crisis. Your assumptions are incorrect, especially during the years leading up to 2008/2009. Banks would get people who undoubtably didn't deserve loans, would handwave over the details and then send people on their way with $1M loans and the borrowers would later fail. I have a friend who worked at Washington Mutual at the time, and she would routinely reject loan applications, and her manager would overrule her. The manager was making $30,000/month in commissions from loan origination, and he didn't give a fuck who was getting the loans because he was being paid and they were getting packaged up and sold to Fannie Mae/Freddie Mac. Meanwhile, people would be getting loans that they couldn't afford, but could make payments because of the 0% interest loans that were actually increasing the principal. But they didn't realize this because the lenders didn't explain all the details to them. It's predatory to take advantage of the fact that most regular people don't have a higher-level understanding of mortgages, and by filling their heads with ideas that it doesn't matter anyway because they will sell the house in a year for a profit. The lenders didn't care because they were incentivized to originate loans even if they knew the borrowers couldn't ultimately afford them. The thought at the time was "the house price will increase in 2 years anyway, so even if you get a $800k loan on a $1M house, you can sell it in 1 year for $1.2M, and then use the $200,000 profit for a downpayment on a real home."
jandrese 8y ago
Typically it means someone has an advantage over the other (usually an information advantage) that they use to extract a more favorable outcome for themselves than they would have gotten in a fair market. In the mortgage market specifically they are loans that are initiated by someone who is planning to offload them ASAP and doesn't care if the borrower has any capability to pay. They may outright lie to the borrower about the situation in order to close the deal. Then they lie to the investors about the quality of the loan in order to offload them as quickly as possible for a large profit.
rtkwe 8y ago
Not entirely because if the lender can bundle these bad mortgages together and sell them it's not really their problem if the borrower can't pay because they've already extracted a lot of value from the loan by selling it. Being able to sell the debt off to another party removes a lot of the issues a lender faces with bad loans. Now in theory they still want to make all good loans but actually evaluating all the loans in a package is hard to impossible. This can incentivize lenders fudging the numbers on loans because a few bad loans failing is fine (so long as lenders as a whole aren't systematically issuing bad loans of course).
flyingpenguin 8y ago
The problem seems to come when the incentive to ensure that the borrower can actually pay goes away. IE: My understanding of the 2008/9 problem where banks were more interested in their banky uses of loans than just "Hey, an investment with good returns."

ceejayoz 8y ago

In some scenarios, the lender has more incentive to let someone make years of mostly-interest payments, then foreclose. An underhanded contract isn't going to be obvious to a borrower with a high school dropout's education level. Even your run-of-the-mill credit card contract is written to an eleventh grade reading level, on average.

gammateam 8y ago

It means the licensed lender has a higher standard to abide by and not take advantage of the borrowers needs Such as creating a claim on everything the borrower will ever have and turning them into a debt serf But hey maybe housing prices go up really really fast

soVeryTired 8y ago

The lender has incentive to ensure that the value of the debt is greater than the initial outlay. That could be via a steady stream of payments, or via a handful of repayments plus a repossession and resale of the property. If the loan originator thinks the latter is likely, I don't think it's unreasonable to call the loan predatory.

docker_up 8y ago

You should research what the predatory loans were during the crisis. Your assumptions are incorrect, especially during the years leading up to 2008/2009. Banks would get people who undoubtably didn't deserve loans, would handwave over the details and then send people on their way with $1M loans and the borrowers would later fail. I have a friend who worked at Washington Mutual at the time, and she would routinely reject loan applications, and her manager would overrule her. The manager was making $30,000/month in commissions from loan origination, and he didn't give a fuck who was getting the loans because he was being paid and they were getting packaged up and sold to Fannie Mae/Freddie Mac. Meanwhile, people would be getting loans that they couldn't afford, but could make payments because of the 0% interest loans that were actually increasing the principal. But they didn't realize this because the lenders didn't explain all the details to them. It's predatory to take advantage of the fact that most regular people don't have a higher-level understanding of mortgages, and by filling their heads with ideas that it doesn't matter anyway because they will sell the house in a year for a profit. The lenders didn't care because they were incentivized to originate loans even if they knew the borrowers couldn't ultimately afford them. The thought at the time was "the house price will increase in 2 years anyway, so even if you get a $800k loan on a $1M house, you can sell it in 1 year for $1.2M, and then use the $200,000 profit for a downpayment on a real home."

jandrese 8y ago

Typically it means someone has an advantage over the other (usually an information advantage) that they use to extract a more favorable outcome for themselves than they would have gotten in a fair market. In the mortgage market specifically they are loans that are initiated by someone who is planning to offload them ASAP and doesn't care if the borrower has any capability to pay. They may outright lie to the borrower about the situation in order to close the deal. Then they lie to the investors about the quality of the loan in order to offload them as quickly as possible for a large profit.

rtkwe 8y ago

Not entirely because if the lender can bundle these bad mortgages together and sell them it's not really their problem if the borrower can't pay because they've already extracted a lot of value from the loan by selling it. Being able to sell the debt off to another party removes a lot of the issues a lender faces with bad loans. Now in theory they still want to make all good loans but actually evaluating all the loans in a package is hard to impossible. This can incentivize lenders fudging the numbers on loans because a few bad loans failing is fine (so long as lenders as a whole aren't systematically issuing bad loans of course).

flyingpenguin 8y ago

The problem seems to come when the incentive to ensure that the borrower can actually pay goes away. IE: My understanding of the 2008/9 problem where banks were more interested in their banky uses of loans than just "Hey, an investment with good returns."