The Subprime Crisis: "Predatory Lending" or "Predatory Securitizing?"
April 20, 2009, 04:40 AM
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For years, mainstream economists pooh-poohed the very existence of the concept of "predatory lending." When two willing parties agree to a transaction, how can one be "predator" and one "prey"?

Of course, this totally ignores differences in, say, math ability between lenders and bottom-of-the-barrel borrowers.

Yet, while I think the concept of "predatory lending" has some merit, especially in areas such as credit card lending, it  mostly throws us off the scent in figuring out the subprime mortgage disaster.

After all, the point of making predatory loans is to extract a stream of high monthly payments from the borrower. But the point of making worthless mortgage originations was not to get paid back a lot of money over the next thirty years (many wouldn`t last past the two year teaser rate period, and by 2005-2006 a fair number of loans never made more than one payment). No, the point was to extract a high payment now from credulous saps who bought the worthless mortgages from you thinking that they would get up to thirty years of high payments.

What hundreds of anecdotal accounts show is a process often involving collusion between the borrower and the originator of subprime mortgages to defraud institutions farther up the financial food chain by selling them garbage. Of course, many financial firms then played a game of Hot Potato with each other, repackaging the garbage loans and selling them on to rich but clueless folks, or insuring themselves with AIG against losses.

Thus, the term "predatory securitizing" may be more useful for describing much of what happened during the Housing Bubble than "predatory lending."

A Google search shows that nobody has used the term "predatory securitizing" before, and only a handful have used "predatory securitization." I would prefer the former version—"predatory securitizing" — since it`s in the same format as "predatory lending."