International Herald Tribune Editorial - Myths spun by lax lenders

International Herald Tribune Editorial - Myths spun by lax lenders
Copyright by The International Herald Tribune
Published: July 11, 2007


Mortgage defaults are rising in the United States, and worse is yet to come. Between now and the end of next year, interest rates on $660 billion in adjustable-rate mortgages will increase for the first time. Over half of that is in subprime loans - those made to borrowers with weak credit - and is at high risk of default.

Regulators recently tightened standards, requiring what should be obvious: that banks have evidence of a borrower's ability to repay before making a loan. And yet lenders who hope to dodge even tougher oversight continue to defend reckless lending.

Lenders often claim that subprime loans have allowed millions of Americans to buy a first home. But most subprime loans were for refinancing, not first-time purchases. And as defaults rise, foreclosures are projected to outnumber first-home purchases - for a net loss of homeownership because of subprime lending - according to the nonpartisan Center for Responsible Lending.

Lenders also assert that borrowers with weak credit had no choice other than costly, adjustable-rate subprime loans. But testimony from congressional hearings suggests otherwise. During the housing boom, borrowers who could have qualified for higher quality, fixed-rate loans were too often steered into dodgier loans. As rising defaults attest, complex loans have not benefited the borrowers. Rather, they met the lenders' desire for upfront fees.

Subprime defenders also assert that it's a borrower's responsibility to repay. Fine. But lenders should not be able to offer loans that do not fit a borrower's credit profile.