Comments on: John Dugan, protector of predators A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: JeffDB Sat, 03 Apr 2010 01:37:05 +0000 I read Mr. Duggan’s quote somewhat differently than Mr. Salmon apparently has:

“For example, a consumer agency might think that down payments on house purchases should be limited to 5% to promote homeownership,”

I interpreted that to mean that he was worried that a Consumer Protection Agency would try to limit the down payment to a MAXIMUM of 5%.

“while a safety and soundness regulator might believe a higher minimum could be needed to ensure lenders don’t make loans that won’t be repaid.”

Although I agree with you that abnormally low down payments present a hazard for the consumer as well as the lender, I can also see the possibility of a consumer protection agency coming out in favor of looser and looser standards.

They may come under political pressure or from potential homeowners themselves to try and force somewhat loosened standards to protect them from too rigid standards that would keep them from realizing their “American Dream”.

By: Yanbaru Wed, 31 Mar 2010 17:19:48 +0000 Felix makes a good point about loose underwriting.

The ultimate exponent of this was Andy Hornby, chief executive of HBOS, the UK bank. He had a background in supermarkets, which thrive on a pile ’em high sell ’em cheap business model. The flaw with applying this logic to home loans is that loans are, of course, not consumer products. After a supermarket has sold its sixpack of beer to a consumer, it will not lose any money if the consumer proves not in a fit state to drink it (because they’re drunk already). After a bank has made the loan, it can still have a deleterious effect on the bank through non-payment.

This raises an even more interesting issue: why on earth did a big blue-chip company decide to hire Mr Hornby to be its new chief executive? Can a failed CEO play a useful role in society, beyond looking after their children and walking the dog? Mr Hornby has at least gone back to retailing (for Alliance Boots).

Any thoughts appreciated.

By: HBC Wed, 31 Mar 2010 02:56:39 +0000 While Dugan imaginatively imputes motives to the agency, he’s dodging the point. Fact: loose underwriting has been going on. Tons of it. And by no means randomly, Captain Renault.

For too long, it was the name of the game at major banks to put loans, lots of loans, on the board with little or no apparent regard for the likelihood of repayment. Loan underwriting was (and last I checked, still is) completely out of control in too many quarters, fronted by major banks.

Lenders lent in an out of control fashion to many people they ought not to have, to some who completely deserved it, to some that were bamboozled and doomed to failure, even to fictitious people who did not exist. These are the facts. Lenders who did not realize the risk they were taking a lot of the time were failing in their (ostensible) primary duty: to lend wisely. That, they too often did not do. So often, it beggars belief in the lending system itself.

See Gogol’s Dead Souls for an approximate comparison. Clearly, there was a market-wide projection-based incentive to lend, lend and lend again at no matter what eventual, inevitable, risk – so great was the rate of recklessness at which much pre-crisis lending was taking place. This is lending by expert professional lenders we’re talking about here.

It stopped being about real estate pretty soon after rampant lend-o-mania began. From then on in, it was about selling paper obligations that the banks dearly wanted to initiate, then resell to third parties with as little delay as possible, rotating numbers for the sake of numbers. Something made them want to do that so badly, they did it badly.

A consumer protection agency worth its salt is liable to want to know what that something is, or was, because its effects still haunt the entire market.

In my estimation, Dugan is fighting consumer protection now as a warm-up battle. What he fears most is a total retroactive audit. Impartial auditors can find all the bad loans and publish the story behind each one, which would be incredibly useful in understanding what provoked this crisis, and could obviously help prevent recurrence.

Honest borrowers have nothing to fear from roundhouse auditing, nor do honest lenders. But those aren’t necessarily the people whom Dugan most vociferously represents.

By: Story_Burn Tue, 30 Mar 2010 23:42:52 +0000 If only Greenspan had regulated sub prime mortgage lending when he had the chance back in 2003

By: dWj Tue, 30 Mar 2010 18:36:35 +0000 Oh, come off it. This is absolutely something that would have happened 5 years ago; “requring a 20% down payment is locking millions of people out of homeownership, so you *have* to permit looser standards” is *exactly* the kind of thing you heard. (Indeed, “sure they can afford a zero-down interest only loan; if interest rates go up, they can just sell the home for a huge gain!”) Don’t imagine that the crash was just a result of regulator negligence; there was a lot of regulator malfeasance under political pressure to make sure that poor people could get themselves financing that, yes, is now in hindsight called “predatory”, frequently by the same people who thought five years ago that any reasonable lending standards were undemocratic. In fact, the day will come again. Within 15 years, it will be elitist, anti-poor, and even racist to suggest that people who can’t afford to buy a home not buy a home.

By: Greycap Tue, 30 Mar 2010 17:12:28 +0000 @alkali, if one regulator says down payments should be at least 5% and another says at least 20%, then there is no problem, even if both regulators have authority: the minimum is 20%. In order to generate a _conflict_ you need to have one regulator say “you must offer loans @ 5% down because it will benefit the consumer” at the same time another says “you must require at least 20% because otherwise you will jeopardize the system.” So whichever way you interpret the quotation, it is nonsensical.

By: alkali Tue, 30 Mar 2010 15:26:55 +0000 The quote is not artfully worded, but I think the suggestion is that the hypothetical regulator might require a minimum down payment of 5%, but not higher.