No, they do require that information to get the subprime loan; it’s just that they classified me as subprime based purely on the lack of credit history, irrespective of that non-loan history. Providing that information, though required, doesn’t get you back into prime territory.
This merely means that their formal criteria for sorting out loan applicants into officially recognized categories disallow the use of this information—which would be fully consistent with my propositions from the above comments.
Mortgage lending, especially subprime lending, has been a highly politicized issue in the U.S. for many years, and this business presents an especially dense and dangerous legal minefield. Multifarious politicians, bureaucrats, courts, and prominent activists have a stake in that game, and they have all been using whatever means are at their disposal to influence the major lenders, whether by carrots or by sticks. All this has undoubtedly influenced the rules under which loans are handed out in practice, making the bureaucratic rules and procedures of large lenders seem even more nonsensical from the common person’s perspective than they would otherwise be.
(I won’t get into too many specifics in order to avoid raising controversial political topics, but I think my point should be clear at least in the abstract, even if we disagree about the concrete details.)
Considering that in the recent financial industry crisis, the credit unions virtually never needed a bailout, while most of the large banks did, which supports the CU = idiot, larger banks/mortgage brokers = non-idiot hypothesis.
Why do you assume that the bailouts are indicative of idiocy? You seem to be assuming that—roughly speaking—the major financiers have been engaged in more or less regular market-economy business and done a bad job due to stupidity and incompetence. That, however, is a highly inaccurate model of how the modern financial industry operates and its relationship with various branches of the government—inaccurate to the point of uselessness.
I actually agree with most of those points, and I’ve made many such criticisms myself. So perhaps larger banks are forced into a position where they rely too much on credit scores at one stage. Still, credit unions won, despite having much less political pull, while significantly larger banks toppled. Much as I disagree with the policies you’ve described, some of the banks’ errors (like assumptions about repayment rates) were bad, no matter what government policy is.
If lending had really been regulated to the point of (expected) unprofitability, they could have gotten out of the business entirely, perhaps spinning off mortgage divisions as credit unions to take advantage of those laws. Instead, they used their political power to “dance with the devil”, never adjusting for the resulting risks, either political or in real estate. There’s stupidity in that somewhere.
Still, credit unions won, despite having much less political pull, while significantly larger banks toppled.
In some cases this was an example of the principal–agent problem—the interests of bank employees were not necessarily aligned with the interests of the shareholders. Bank executives can ‘win’ even when their bank topples.
The principal-agent problem should always be on the list of candidates, but it can occasionally be eliminated as an explanation. I was listening to the This American Life episode “Return to the Giant Pool of Money”, and more than one of the agents in the chain had large amounts of their resources wiped out.
The question of whether an agent’s interests are aligned with the principal’s is largely orthogonal to the question of whether the agent achieves a positive return. The agent’s expected return is more relevant.
There were many agents involved in the recent financial unpleasantness whose harm was enabled by the principal-agent problem. My intended examples did not suffer that problem. I could have made that clearer.
SilasBarta:
This merely means that their formal criteria for sorting out loan applicants into officially recognized categories disallow the use of this information—which would be fully consistent with my propositions from the above comments.
Mortgage lending, especially subprime lending, has been a highly politicized issue in the U.S. for many years, and this business presents an especially dense and dangerous legal minefield. Multifarious politicians, bureaucrats, courts, and prominent activists have a stake in that game, and they have all been using whatever means are at their disposal to influence the major lenders, whether by carrots or by sticks. All this has undoubtedly influenced the rules under which loans are handed out in practice, making the bureaucratic rules and procedures of large lenders seem even more nonsensical from the common person’s perspective than they would otherwise be.
(I won’t get into too many specifics in order to avoid raising controversial political topics, but I think my point should be clear at least in the abstract, even if we disagree about the concrete details.)
Why do you assume that the bailouts are indicative of idiocy? You seem to be assuming that—roughly speaking—the major financiers have been engaged in more or less regular market-economy business and done a bad job due to stupidity and incompetence. That, however, is a highly inaccurate model of how the modern financial industry operates and its relationship with various branches of the government—inaccurate to the point of uselessness.
I actually agree with most of those points, and I’ve made many such criticisms myself. So perhaps larger banks are forced into a position where they rely too much on credit scores at one stage. Still, credit unions won, despite having much less political pull, while significantly larger banks toppled. Much as I disagree with the policies you’ve described, some of the banks’ errors (like assumptions about repayment rates) were bad, no matter what government policy is.
If lending had really been regulated to the point of (expected) unprofitability, they could have gotten out of the business entirely, perhaps spinning off mortgage divisions as credit unions to take advantage of those laws. Instead, they used their political power to “dance with the devil”, never adjusting for the resulting risks, either political or in real estate. There’s stupidity in that somewhere.
In some cases this was an example of the principal–agent problem—the interests of bank employees were not necessarily aligned with the interests of the shareholders. Bank executives can ‘win’ even when their bank topples.
The principal-agent problem should always be on the list of candidates, but it can occasionally be eliminated as an explanation. I was listening to the This American Life episode “Return to the Giant Pool of Money”, and more than one of the agents in the chain had large amounts of their resources wiped out.
The question of whether an agent’s interests are aligned with the principal’s is largely orthogonal to the question of whether the agent achieves a positive return. The agent’s expected return is more relevant.
There were many agents involved in the recent financial unpleasantness whose harm was enabled by the principal-agent problem. My intended examples did not suffer that problem. I could have made that clearer.