Follow-Up: Mortgages

I noted with great interest the other day that Connecticut had become the fourth state (following Illinois, Florida and California) to take Countrywide Financial to court over predatory lending practices. So far there's no standard definition of what "predatory lending" actually means, and the Federal courts are understandably reluctant to dive into that quagmire, but all of the states involved in these suits have been hit hard by the mortgage/housing crisis, and at least one of them has laws against misleading consumers into purchasing things they can't afford. Under the circumstances, it's somewhat like closing the barn door after the horse has already fled; the mortgage/housing crisis is already a national disaster and Countrywide is already facing bankruptcy (or more likely acquisition) because its part in the disaster has also decimated the company's finances. Still, I can't help feeling a vague glee at these events, and not just because Countrywide used to be my mortgage holder. I thought this might happen...

It's important to note that there can be no laws enacted against making money off of the stupid; if only because so many of our states need the income from lottery purchases. If someone wants to do something that runs contrary to their own interests, but which will generate earnings for you or your company, there are no laws to prevent you from assisting them in this enterprise, nor could there ever be. There are laws that require businesses to warn their customers away from hazardous or dangerous activities, and it's quite possible for someone to sue you if you fail to warn them that what they intend to do is dangerous or hazardous, but if someone decides to purchase a fireplace, fill it with lamp oil, and burn a pile of dollar bills in it, there are no laws preventing you from selling them the fireplace or the oil. And if Countrywide and the other lenders had warned people off of mortgages they could not afford, or even just asked the equivalent of "Are you sure you want to do that?" they would not be in this mess -- and neither would we...

What these suits allege is that the lender -- and many other companies in the same industry -- deliberately encouraged people to take out mortgages and loans they could not possibly afford, so that Countrywide could foreclose on their property, thus effectively seizing all of the payments made and equity acquired by the borrower, and then resell the foreclosed houses and recover all of the loan money as well. It's completely unethical business practice, but it remains to be seen if this is actually illegal in and of itself, if it can be shown to violate laws against fraud or deceptive business practices, or if the States or Federal governments need to pass specific laws forbidding this type of operation. Personally, I suspect that such laws are inevitable, unless the industry's lobbyists can block them from passing. Or just stall until the current crisis is over...

Because you can be sure this isn't the last time it will come up, unless Federal legislation is enacted to prevent future predatory lending. The ongoing slump in the housing industry had stuck dozens of lending institutions with foreclosed houses they can't sell; effectively worthless assets for which they paid cash. The industry is backing away from such loans now (actually, "fleeing pell-mell in any other direction" might be a better description), and a lot of the worst offenders may go under even if they aren't sued out of existence by aggravated states and cities, but unless the practice is actually outlawed, there is nothing to keep these companies from trying again during the next housing boom. In fact, if history teaches us anything, it is that people do not learn from past disasters, and this same cycle will almost certainly repeat...

Which leaves me with a difficult question: Should we hope that Countrywide loses these lawsuits and is punished for its role in creating the current housing crisis and economic slump? Or should we hope that it manages to skate free from any repercussions, and the resulting outrage triggers a groundswell of public opinion, forcing Congress to ignore "campaign contributions" and lobby efforts from the mortgage industry for long enough to pass laws forbidding predatory lending practices in the future? Especially when we consider that if these suits are successful we can almost guarantee that other States and cities will sue Countrywide and similar lenders in a multitude of additional actions, resulting in further lost jobs, bankrupted companies, and squandered or destroyed assets. All things considered, I think I'd rather just have the legislation, but experience tells me that's not the most likely outcome...

Stay tuned, folks. I've got a bad feeling about this one...