Preying on the Fiscally Strapped
The subprime mortgage market problems are now widely reported, but what's not so widely known is how the subprime lending market has been purposely setup to create easy wealth at the expense of the hard-pressed American. Along with the bankruptcy bill that made it possible for inordinate and immoral interest rates to be charged, came the deregulation of the lending market just at the time many people were struggling to keep up with their current bills. As this MarketPlace report shows, one major reason for easy credit was so investors could make lots of money on those struggling to keep up with their debts.
So, why has so much lending — credit cards, car loans, fast cash — gone subprime? Alan White researches the industry's underpinnings at Community Legal Services in Philadelphia.
ALAN WHITE: What's happened, because of deregulation and the free flow of lending capital through the securities markets, is that there's all this capital chasing American consumers. And the result of that has been riskier, higher-priced credit chasing out more prudent credit.
White says high-priced credit displaces regular lending for several reasons. First, it's lucrative. And it's fed by worldwide investor demand for lenders' securities. That demand floods markets with cash to lend.
With loads of new cash, lenders loosen standards and aggressively market credit. Like the six billion pre-approved credit card solicitations mailed out in 2005.
Looser lending standards add risk. Alan White says the subprime push then starts feeding on itself, stoking ever-higher rates on a given individual's loan.
WHITE: And it becomes subprime, not because the individual has changed, but because the amount they're borrowing has pushed their debt ratios to the point they can't qualify for conventional credit.
If the high-priced loan becomes a problem or if payments are late, which happens more these days, the borrower's credit rating suffers. That makes their next loan more likely to be subprime. And on it goes.
And, of course, the bankruptcy bill that passed in 2005 is waiting in the wings to catch the delinquent in its maws. The money lenders get to have it both ways in the new American economy.