Tuesday, May 15, 2007
John Edwards, poverty, and sub-prime mortgages.
Sticking to his poverty theme, Edwards has recently focused on the well publicized problems in the sub-prime mortgage industry and its lending practices over the past several years. From yesterday's Washington Post:
Last month, Edwards announced a plan to fight predatory lending. He said that an increase in subprime loans and predatory mortgages was resulting in a surge of foreclosures that risked "devastating communities," and that "shameful lending practices . . . are compromising our strength as a nation."
I started my post business school career as a mortgage-backed securities analyst, so I know a little something about this business. There is nothing in the statement above that I can disagree with, although I should add that mortgage finance is a lot more intricate and complex than the media hype reflects.
Subprime lending is not, by definition, predatory. Properly executed, it makes mortgage financing available to borrowers who could never have qualified for a loan under more traditional mortgage lending guidelines. Institutions bear greater risk lending to less credit worthy borrowers, in many cases with less equity down, and therefore must be compensated at a higher rate than they would lending to strong credit. More lenient underwriting is not predatory, and neither are higher interest rates. I should also just mention that when I was in this business, the big complaint being made by politicians was about discriminatory lending practices that did not make enough mortgage financing available to the poor. The subprime lending industry was developed to meet that need.
Now predatory lending has been a huge problem, and as the whole subprime mess unravels I think we'll start to see evidence of rather blatent fraud and lending abuse, and not just in the subprime sectors. The real estate market of the last four years created the impression that home equity would simply grow organically, and if you happened to have a deed on some real estate this value would accrue to you. This created an environment where legal but stupid mortgage products like interest-only and negative-amortization loans could be easily sold to greedy home buyers who thought they had found a free lunch. It also created an environment where less educated and first time home buyers could be easily duped by unscrupulous mortgage brokers, some of whom certainly belong in jail. It was a bubble, with the excesses and abuses that come with any bubble, and it has popped. The deflation has begun, but real estate prices adjust slowly, unlike the popping of the dot com bubble in 2000.
Back to the Washington Post, which reports:
The hedge fund that employed John Edwards markedly expanded its subprime lending business while he worked there, becoming a major player in the high-risk mortgage sector Edwards has pilloried in his presidential campaign.I hope I've demonstrated that I don't buy into the sub-prime hype and so I don't think Edwards did anything wrong here. I don't even think he's a hypocrite, as long as he is appropriately careful in castigating only the segments of the market that were engaged in fraud.
Edwards said yesterday that he was unaware of the push by the firm, Fortress Investment Group, into subprime lending and that he wishes he had asked more questions before taking the job. The former senator from North Carolina said he had asked Fortress officials whether it was involved in predatory lending practices before taking the job in 2005 and was assured it was not.
Edwards said his role at a company with a growing stake in the subprime industry should not be seen as undermining his commitment to helping the poor. He noted that since the 2004 election, he has founded a poverty think tank, started a charity for poor college students and assisted campaigns to raise the minimum wage.
"If you put it in the context of all those things, it's very clear where my heart is and where my commitment is," he said.
Fortress's growing role in the subprime lending market provides a second contrast between the firm's business practices and the positions Edwards has taken as the presidential candidate who has made poverty a major campaign theme. The Washington Post reported last month that Fortress's partners and its foreign investors benefited from the kind of offshore tax breaks Edwards has criticized as a candidate.
But exactly what did John Edwards do at this hedge fund, and why wasn't he more aware of the businesses it was involved in? I think his ignorance raises more questions about his governance capabilities. After all, in a country where we now ask our corporate executives to take personal liability for the work of their accountants, shouldn't an executive who wants to become Chief Executive pay a little more attention to what is going on on his watch?
7 Comments:
By 
, at
Tue May 15, 10:01:00 AM:
Twenty percent down, no more than 28 percent of gross for payments. Can't go wrong with that!
By 
SR, at
Tue May 15, 12:51:00 PM:
Nah: Edwards was just practicing the deniability skills he'd need in spades if he were President. The queston I think it raises, is just what exactly was his "job," and how much was he paid? If he he indeed actually work in the private financial sector, he might have actually learned something about how it works, and about what happens when projects don't go successfully to profitability. You lose your job! Now there's the cause of poverty.
By Cardinalpark, at
Tue May 15, 02:18:00 PM:
I hadn't followed this bit of Edwards' gaffe. Fortress? Poverty? That is literally hilarious. I almost can't think of a more ridiculous answer to a question as to why one goes to work at a hedge fund.
TO MAKE MONEY, you idiot. How f'ing stupid does Edwards think everybody in America really must be?
I do business with the boys at Fortress, who recently took public their asset management firm and made themselves billionaires in the process. Wes Edens, Pete Brigger and company are money making machines. And as a borrower, I can guarantee you these guys are PREDATORS!!!
Cripes, this is America! The only thing Edwards would learn about poverty while it Fortress would be how to impoverish your corporate counterparty and where to give your charitable donations.
IALMFAO - uncontrollably
By Christopher Chambers, at
Tue May 15, 03:03:00 PM:
Actually, it's not just "less educated" people who got and are getting ripped off on so many levels. (and let's not forget how the collection and bank lobby forced changes in the bankruptcy act based on "evidence" flimsier than the justification for war in Iraq).
By the way, more chickens coming home to roost: GOD just got plain sick of Jerry Falwell. I'm sure Pat Robertson's trying to cryogenically freeze himself now. Hopefully God will talk to him soon, as well as crow-bar Wolfowitz out of the World Bank...
By SR, at
Tue May 15, 04:20:00 PM:
CC:
Any reason why Wolfowitz shouldn't work at the World Bank, other than anti-Neo-con hysteria?
By Purple Avenger, at
Tue May 15, 04:45:00 PM:
it's not just "less educated" people who got and are getting ripped off on so many levels.
Ever do a walk through on a repo?
By , at
Tue May 15, 05:37:00 PM:
There are reasons to use a higher than normal interest loan. I have used them myself. I was aware of the risks and was prepared to accept the risk.
