2002: Rise in Questionable Mortgage Lending Practices

Simon Hampel · 29th Oct, 2008

I was reading through various journal articles and discussion papers on financial literacy for a uni assignment I have due next week and came across this interesting discussion by some Americans on the rise in questionable mortgage lending practices.

Braunstein S., & Welch C. 2002, ‘Financial Literacy: An Overview of Practice, Research, and Policy’, Federal Reserve Bulletin, Vol. 88 Issue 11, p.445 - 457

Rise in Questionable Mortgage Lending Practices

An increase in anecdotal reports of unfair and deceptive home equity lending practices in the late 1990s raised concerns about the scope and impact of unscrupulous credit arrangements, commonly referred to as predatory lending. Investigations and public hearings by federal, state and local government agencies to identify possibly unethical or predatory mortgage lending practices revealed that in many cases the terms of such contracts are not technically illegal but rather are inappropriate for and disadvantageous to consumers. An example is a loan structures with relatively small fixed payments in the early years but a large "balloon" payment at the end of the loan term. Such a structure recognizes that a younger borrower's future earning potential is generally greater than his or her current income and assumes that the borrower will be able to refinance at the end of the loan term. While the arrangement makes mortgage repayments more affordable for some borrowers, it can be devastating to those living on fixed incomes.

Efforts by government agencies to better understand predatory lending have generally found that the distortion or inappropriate use of credit provisions, coupled with the inherent complexity of mortgage lending, sometimes results in borrowers becoming entangled in a financially devastating credit quagmire. Borrowers who are unfamiliar with credit transactions and unaware of the full implications of the loan terms may be vulnerable to unethical lenders' sales strategies. Although regulatory protections and legal remedies are important, consumer education is seen as an essential element for combating and preventing predatory lending
Click to expand...

... just found it interesting that the "sub-prime" problem probably had its roots back in the late 90's ... not necessarily a recent phenomenon (although the more recent collapse of the housing markets and subsequent devaluation of securitised mortgages is obviously what lead to the current problems).

Log in or Sign up

2002: Rise in Questionable Mortgage Lending Practices

Simon Hampel Founder Staff Member

Log in or Sign up

2002: Rise in Questionable Mortgage Lending Practices

Simon Hampel Founder Staff Member

Useful Searches