Thursday, October 23, 2008

Irresponsible Lending Continues

I have a friend who is a single mom of three kids making $30,000 as a preschool teacher and living in an historic house in Gloucester, MA. This summer, right smack in the middle of a housing crisis and finger pointing at irresponsible lending, my friend found her finances giving an uncomfortable squeeze. She went to her bank for a home equity loan. She didn't need to use the loan right away, but wanted it there in case that squeeze became a strangle. She asked the bank for $25,000. Her house is valued at much more than that, but she didn't want to get into a bad debt situation. You know what the bank did? They offered her $400,000.

My friend was shocked. "Are they crazy?" she asked me. She went back to the bank and asked them if they were indeed crazy. She pointed out that she only earns $30,000 and as a preschool teacher isn't likely to earn much more in the future. The bank actually proceeded to argue that the loan was in her best interest. After much back and forth she was finally able to talk them down to the $25,000.

So several things are going on here. Maybe the bank was hoping that she'd eventually default on her loan and they would then gain her historic and valuable house. Or maybe they were only looking at their own loan income. Or maybe they really were crazy. No matter how you look at it this is a fine example of irresponsible lending. The amazing thing is that this behavior that got us into our current economic mess still continues.

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