Here is history’s warning: “Every new loan that is larger than the last contributes to increasing over-all economic instability. The outcome of such has historically been a crash corresponding to the magnitude of this debt distortion.” The quote comes from our booklet “The History of Predatory Lending“. Here is a pefect example of debt distortion:
Debt distortion in the form of asset backed securities spans everything from home equity loans, to auto financing, credit card receivables, and student loans. Take the case of HSBC’s HFC and Beneficial Finance. These home equity loans are often amortized over 30 years, but you must pay them back in 10 or 11 years. The payment, calculated on daily interest, cannot pay off the loan in 10 or 11 years. A borrower making the quoted payment will owe HSBC about as much at the end of the 10 or 11 year cycle as they borrowed in the first place. It is not like the old days where you had a payment book and the loan was paid off when the last coupon was mailed.
Does that sound like today’s ‘interest only’ home loan? Remember if you will that subprime is driven by one’s credit score. Alt-A loans are driven by the market. Predatory was once defined as “not driven by market imparatives but simply because the lender found a way to get away with it.” Lenders found ways to get away with many things in recent years, thus the lines between fraud, subprime, and today’s problems are very blurred.