Tonight’s my monthly appearance on About the Money with Josephine Cheng, in which Josephine and I talk about debt consolidation. 7:30 pm on KCTS-9, repeating on Sunday morning at 10… check it out.
December 2008
A Big Step Forward on Predatory Lending Relief
Major news from Massachusetts this week, with the state’s Supreme Judicial Court upholding an injunction forbidding Fremont Investment & Loan from foreclosing on borrowers to whom it had issued what the court judged to be predatory loans. As Adam Levitin observes at Credit Slips (emphasis mine):
The Massachusetts Attorney General had argued that “a lender’s failure to reasonably assess a borrower’s ability to repay his loan and the use of loan features that predictably lead to foreclosure is unfair and deceptive and in violation of Massachusetts law.” More precisely, a consumer loan that is not intended to be repaid, but intended to be refinanced (a process that can only work if property values rise indefinitely) is inherently predatory. By upholding the preliminary injunction, the SJC endorsed this view and imposed a serious good faith workout effort on Fremont.
The decision by the court to recognize as inherently predatory a class of loans that are designed to be all but impossible for the borrower to pay off as structured can’t be emphasized enough. It’s beyond reasonable doubt at this point that the final years of the housing bubble were powered by increasing numbers of teaser-rate mortgages, especially in the option ARM or “pick-a-payment” space, that were never intended to be repayable by the borrower after the reset period. Even borrowers who aren’t currently upside down on such loans may encounter difficulty refinancing their way out if credit remains as tight as it has recently; those that can’t refinance often find their monthly payments doubling or worse. If the Massachusetts SJC’s interpretation of what constitutes an inherently predatory loan catches on in other states it could mean relief for thousands of distressed homeowners.
“About the Money” Video Available
I just discovered that KCTS provides embeddable video of About the Money segments, including the ones I’ve appeared in. Fun! Here’s the segment from November 18, where Josephine and I discuss debt collection practices:
And here’s the segment from October 14, where we discuss the housing crisis:
The Music Stops for the Tribune Company
Given the times, the bankruptcy filing of a major communications company might perversely go all but unnoticed. Still, it’s worth our while to take a closer look at this one. Many of the reports this morning about the Tribune Company’s Chapter 11 bankruptcy have highlighted the precarious position of newspaper companies in an era of declining subscriptions and advertising revenue. But on the operations side, the Tribune Co. is actually very healthy: every one of the newspapers and television stations (including Seattle-area stations KCPQ and KMYQ) in its portfolio is profitable. The only reason Tribune had to file for bankruptcy is that Sam Zell, the real-estate billionaire who bought the company last year and serves as its CEO, saddled the company with $8 billion in debt as part of a heavily leveraged buyout in which Zell only put up 3 percent of the purchase price.
The analogy with the bursting of the housing bubble is hard to ignore: both are symptomatic of a financial culture that largely did away with traditional notions of risk in favor of a large-scale game of musical chairs in which all the players gambled that they’d be able to find a seat when the music stopped. Unfortunately, with every day that goes by there seems to be fewer and fewer seats to go around.