Tyler Cowen: “Predatory Borrowing The Bigger Problem”

Original title:  Tyler Cowen, Apologist for Fraud?


Over the years, I’ve noted the problems I’ve had with Economists in general seem to fall into one of three categories:

1) They are not particularly good at their jobs — assuming their jobs require them to review economic data and determine what it means;

2) Economists, like academics, can be "reality challenged." This typically involves a skewed conception of reality, often so divergent from the real world experience as to make their conclusions erroneous and their methodology suspect;

3) The abuse of economic data for political purposes.

Today’s example is via the Economic View column in the NYT. I usually find Tyler Cowen’s work at Marginal Revolution interesting and thought provoking. However, his column today is perfect fodder for our example of a "reality challenged" economic discussion (#2, above).

Cowen puts forth an argument that while "there has been plenty of talk about predatory lending, predatory borrowing” may have been the bigger problem."

How utterly silly.

This places Cowen in the role of being an apologist for the lack of lending standard’s worst excesses during the credit bubble. Even worse, it reveals his complete misunderstanding of what occurs in the real world of real estate agents, banking, mortgage brokers and predatory lending.

First the excerpt:


"As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.

Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter."

Anyone who works in this area knows that the reality of the situation was far more blatant. To begin with, most people are naive when it comes to any financial product. They rely on the experience of the professional they are working with, even if this person is a SALESMAN or another party in an ADVERSARIAL NEGOTIATING ROLE.

I work with many builders and mortgage lenders; I take personal responsibility for a major builder selling much of his company’s stock in 2005 (more than $100 million worth). The rest of the family hated me — for about 6 months. I know how their company works, and I know what they and others in their field do in actuality.

During the hey day of the no-income verification, "No Doc" loans, the builders finance people, as well as other mortgage brokers walked people through the application process. Mr. Cowen writes that "Too often, mortgage originators and middlemen looked the other way." That’s a rather generous read on it. The reality is that THEY TOLD PEOPLE WHAT INCOME TO WRITE. They used sentences such as "Put down $150k." OTHER TIMES THEY APPLICANTS LEAVE THE INCOME SPACE BLANK; The reps later conveniently filled in the data on the own.

To claim mortgage originators and middlemen only looked the other way is putting too fine a point on it. THEY WERE ACTIVE COLLABORATORS IN ANY FRAUD.   

Oh, and, don’t take my word for it — find some people from the industry and ask them yourselves. This is a very well known fact amongst real estate agents, mortgage brokers, and builders.

If you thought the reality challenged Mr. Cowen was merely repeating the data of an industry shill, that’s just the first half of it. Consider the next paragraph:

"In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application, especially because unemployment in general has been low during the last two years."

I have noted that of the 3 million new homeowners the credit bubble created, I expect half to two thirds  to ultimately return to their prior status as renters. That’s what happens when you buy a property you cannot afford. And, i don’t think the government should bail these people out. However, I find it utterly contemptible to accuse these people of fraud.

Mr. Cowen should be ashamed of himself . . .


UPDATE2 : January 14, 2008 5:22pm

To clarify one point, I specified a laundry list of who was responsible for the lending mess back in
August of last year. The borrowers are near the top of list.
responsibility was widespread, with plenty of blame to spare:

  • Federal Reserve (FOMC)
  • Borrowers
  • Mortgage brokers
  • Appraisers
  • Federal Government
  • Fannie Mae
  • Lending banks
  • Wall Street firms
  • CDO Managers
  • Credit agencies
  • Hedge funds
  • Institutional Investors (pensions,
    insurance firms, banks, etc.)
  • And back to regulatory role of the
    Federal Reserve

But borrowers as predatory? Give me a break.


UPDATE: January 14, 2008 1:35pm

Professor Cowen adds the following comment:

I thank Barry for his kind words in the post but I think his criticism is a simple misunderstanding. I think the lenders are greatly
at fault, as does anyone else with a fair mind. Pointing out additional
faults elsewhere doesn’t (and should not be understand as) subtracting
from those faults. More generally, the point of my column was to point
out some new information about a bunch of different economic issues,
not to provide a comprehensive survey of who was at fault in the
mortgage crisis. I didn’t even mention the regulators but clearly they
are at fault too and of course you could lengthen the list of people at
fault. I think the title of this post is misleading and I would like to
ask Barry to reconsider it.

–Posted by: Tyler Cowen | Jan 14, 2008 1:20:34 PM

I think I have been mostly offended by the following line:  "there has been plenty of talk about predatory lending, predatory borrowing” may have been the bigger problem."

Either its a false but cute attempt to be clever, or, quite possibly, a case of shifting the blame from the lenders to the borrowers. Regardless, that line is misleading in extremis.


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