Lending Crisis

tag:blogger.com,1999:blog-7247387950566937344.post-20436607080294871292007-08-17T10:25:00.000-04:002007-08-17T10:26:50.953-04:00Lending Crisis“Stocks Plunge as Subprime Losses Take Toll.” “Schools Steer Students to Backbreaking Loans.” When business stories find their way to the evening news and the front pages of the morning papers you know you have a problem. That’s where we’ve been reading about mortgage companies that sold expensive mortgages to low income borrowers and about companies bribing college administrators so they can take advantage of students looking for tuition loans. These stories are burning me up and I’ll tell you why. Each of them involves companies – reputable brokerage firms on Wall Street and hard-working mortgage brokerage firms on Main Street -- that got seduced by the quick fees and easy profits. All they had to do was convince borrowers to sign a few pieces of paper to buy a house or go to school. And all their salesmen had to do was sit across the table from eager borrowers and tell them how much money they were going to lend them. Trouble was, many of the borrowers had no business taking out the loans. Sure, many people benefited from access to the loans; probably a lot of young couples buying a first home and students striving to be the first in their families to get a college degree. But many also were elderly couples on fixed incomes and students without any income at all. Sure they got the money but they didn’t know what they were buying. I read in the paper the other day about a woman who thought she was buying a fixed rate loan when she had really bought a variable rate loan…before interest rates started going up. Early in the last century, stockbrokers persuaded millions of Americans to buy stocks on credit, that is, to borrow the cost of the stocks on the theory that they would pay back the loans when the stocks went up in value. Then came 1929 and many of these investors found they had worthless paper on their hands and no way to pay off the loans. The result was federal legislation that prohibited the purchase of stocks with more than 50% borrowed funds. When you buy stock today you’re not exposed to the risk of instant bankruptcy if the stock market gets walloped. In the commodities world, when MXenergy buys three years of natural gas or electricity supply for its customers it must have sufficient capital to meet its obligations. After all, our customers don’t pay us for months after we deliver their gas or power. We maintain a strong balance sheet that gives our suppliers and our bankers the confidence that they can deliver energy and credit to us and that they will be paid. These kinds of rules help make sure that people – and companies -- don’t get overextended. Wall Street probably had it coming. Like they say, “Summertime and the living is easy…” But then there is, as Shakespeare said, the “winter of our discontents.” Let’s hope that before next winter Congress can do something to make sure that lenders can’t sell – and borrowers can’t buy – products that may not be good for them.MXpressionshttp://www.blogger.com/profile/13290857345894039888noreply@blogger.com