Saturday, 12 January 2008

U.S. mortgage lenders are sued by cities: Is it the legitimate way?

One of the things that I was quite surprised to see last week was lawsuits by cities of Baltimore and Cleveland brought about against WFC and other big mortgage lenders on the ground that these banks discriminated against low-income black borrowers by charging them with excessive mortgage premiums and incorporating prohibitively high penalties into mortgage contracts. While the underlying motives why cities decided to do it are very sad, what is surprising (and somewhat amusing) to me was the type and timing of the reaction by bureaucrats to the crisis. In a sense, they remind me a boxer who passively misses numerous blows in the face during the fight time and then decides to fight when the final gong sounds and it is actually too late to do something.

I understand why these cities resort to such desperate measures - nobody likes seeing deserted neighborhoods, falling municipal revenues, higher crime levels, families without homes, and growing social unrest among low-income minorities. But my question is: Where were these city bureaucrats when the banks offered their mortgages to these low-income borrowers? Why did not they complain at that point? Why did they allow WFC and other lenders to offer mortgages to fellows with unstable, low paying jobs? Where were the government officials from all levels of the public hierarchy (local, state, and federal) when this was happenning? I am pretty sure these city officials themselves will not suffer through the crisis and will not lose their union-backed jobs (in the very unlikely case they do, they will get nice severance packages).

I am not trying to defend the banks and mortgage companies. These mortgage and banking guys will do anything to make money, beat their bottomline performance targets, and collect nice bonuses based on this performance. They do not care about social consequences of their actions. The government should have cared about it. Highly-leveraged, low-equity real-estate purchases are very dangerous. They can virtually enslave people for years and some of them for life. Not everybody is fortunate enough to have a well-paying job, but almost everybody wants to own his/her real house. The banks prey on people using this own-your-own-house dream as a bait.

I agree that the banks and mortgage companies should ultimately pay for the consequences of their predatory actions. But the government should punish them not through pathetic lawsuits brought by the cities, but through (1) the legislature that prohibits low-equity real-estate financing and (2) a clear "No" to any multi-billion taxpayer-financed bailout programs, because such programs would never let the banks learn in the hard way what is the true price of the "moral hazard" problem and its consequences.

I very much like it as a long-term value investor when the banks make nice juicy ever-increasing profits and hike their generous dividends every year. As a socially responsible citizen, I will not complain if these increases are more moderate, as long as there are no debt-related crises in the future. Otherwise, we have the legitimate right to put the banks on the list of sin stocks, along with casino stocks and stocks of cigarette, alcohol, and coffee makers and distributors. The addiction promoted by the banks and mortgage sellers is the own-the-house dream, the price for this addiction is life-long financial slavery and personal bankruptcies. This price sounds bad enough for me.

No comments: