Say “Subprime” one more time and I kick your teeth in. Seriously.

Okay, Official Hatred Time for the word "SUBPRIME". Seriously, I’m starting to snarl, visibly and involuntarily, every time I hear it.

Why? Because it’s a blame-shift, a subtle and insidious one, and one that should emphatically NOT be gotten away with.

"Subprime" makes it sound, quite simply, like these were below-par borrowers. Banks are constantly using this word to make it sound like the current housing/credit crisis was caused by them just being too gosh-darn generous, and giving loans to people who had no business getting them. Who, if they were better or more responsible people, wouldn’t have gamed the system and taken advantage of all the stellar opportunities our lovely banks were offering. This is four-star, grade-A bullshit.

What’s bad here is the LOANS, and the way they were SOLD to people. We’re talking sales tactics that would be so illegal, were they in any properly regulated context, that the word "fraud" kind of shrinks in awe in the face of them. What happened to cause the glut of people being unable to pay their loans is actually very simple, once you get familiar with it, as I’ve had to:

* banks wanted to make more money. (I’ll wait while you recover from the shock. Oh, and the wave of sympathy you probably feel, for how very poor and underpaid banks were to begin with.)

* they realized that they could make lots more money "flipping" loans — dealing in paper, selling the loans as fast as possible, playing the market — than they ever could actually making loans and collecting payments. That’s not to say there isn’t good money in servicing loans, just that there was more money in being a shady middle-man, and banks very consciously decided to go the latter route.

* after a while of doing that, they caught on to the fact that, once they weren’t actually servicing the loans anymore, they no longer had to really care if the loans got paid back in the long run.

* banks realized that they had a product already available — the adjustable rate mortgage — which, while designed for and typically only sold to the very rich, could technically be sold to people in lower income-brackets, as long as you didn’t care whether they were going to be able to make the payments after the adjustments began (typically between 6 months and 2 years into the mortgage).

* banks deliberately encouraged this practice, by:

1) developing whole new lines of adjustable and similar loan products, most of which were worded specifically make them sound appealing and plausible for lower and middle-income people who were looking to buy or refinance a home — you may remember, not so long ago, they were advertised this way on TV!

2) offering huge commissions and kickbacks on these products, much bigger than they were offering on safe, traditional loans

3) doing NOTHING to check on whether these new, riskier loans that were being written were actually plausible.

a) there was little to no oversight or double-checking procedure in place to scan the loans for legitimacy when they hit the bank — since they were just bundling and selling them anyway, they literally had no reason to care, past whether the loan was sold to a real person;

b) in many cases, these loans could be written, and accepted by the bank, using much less documentation than was required for a normal, less-risky loan

c) oh, and banks never bothered to regulate or license their brokers, not minding that literally any schmoe with half an education could be out there, selling loans and collecting checks, with nobody checking on them at all

…

Now, here’s the thing: If it weren’t for speculation creating a "housing bubble" which eventually burst, the banks probably would have gotten away with this. They knew, when they did it, that many people would be stuck with bad loans and end up losing their homes, and they didn’t care, because they would still make a boatload of money.

What’s almost funny, really, is that they didn’t count on the downturn in housing prices, which resulted in a LOT MORE people ending up stuck and facing foreclosure than the banks had bet on. Their bad loans came right back to bite them in the arse, and now, they’re playing all hurt and put-upon.

Well, it’s my job to talk to the families on the other end of this crisis every day. I’ve seen hundreds of people who genuinely thought that they were doing the right, financially smart thing, by buying a home or getting a refinance. In contrast, I’ve met less than ten people who were stupid, or trying to "pull something", when they got their loans.

On paper, it looked like they could make the payments. Their loan officers told them that they should go ahead with it. Nobody at the bank batted an eye. WHY, exactly, was it THEIR responsibility to know the industry, the fine-print and the workings of the home-loan industry better than the people who are supposedly professionals?

I get angry at the commenters on The Consumerist a lot, because it’s a very popular stance to take lately, to blame the homeowners for getting bad loans and losing their homes. This blame is caused, I think, in many ways by the language that we let get attached to the issue. In real terms, "subprime" designates a mortgage (any mortgage, adjustable or not, risky or not) that’s given to someone with less-than-good credit. I won’t get started–yet, today–on why credit scores are also bullshit, and how disappointed I am in our society for accepting them as barometers of someone’s financial worthiness. But the fact is, even aside from that, that a very large chunk of the problem mortgages were given to people with excellent credit. Credit-worthiness has nothing to do with it, and neither does being poor. The majority of the people who land in my office, in trouble because of bad loans, had great credit (they may not now, now that they’ve been sunk by ballooning mortgage payments — oh, but of course they can’t refinance out of their bad loan, because now their credit score is too low!). Most of them are middle-income families, making more than I do.

IT’S NOT A PROBLEM WITH "SUBPRIME BORROWERS". IT’S A PROBLEM WITH CORRUPT BANKS. And as someone who "educates" and "assists" these borrowers every damn day, I can say without hesitation that this problem will NOT be fixed, in any way, unless and until we slap some heavy regulation on banks, on what they can offer phat commissions on, on their responsibility to verify the quality of loans before issuing them, and on how and when they can sell those loans in the speculative market (if at all — I’m more than a little in favor of forbidding it).

Oh, when I say the problem won’t be fixed? I also mean that there’ll be darn near nothing we can do to help the people who need help, either, until or unless someone forces the banks to clean up their mess. The government position that "banks will voluntarily work with their borrowers" is a veritable reservoir of bullshit. Banks aren’t doing any such thing, unless they absolutely have to. Most borrowers are not stupid or clueless about their mortgage — you’d know if you’ve had one; you think about it a LOT. Most of the people I see started calling their mortgage companies for help months before they started having trouble with the payments, and 99.99% of them got the finger. When it comes to getting the kind of mortgage modifications our beloved Executive Branch is so keen on telling us the banks will give us — refinances into fixed-rate loans, forgiveness of amounts that are way over the value of the home, help selling the home when the mortgage is more than it’s worth — my experience is that you either know a high-up politician, you have a very good lawyer who will harass them for you, or YOU ARE SCREWED. I wish, wish it wasn’t that way, but it just is. Banks are, predictably I think, doing the absolute least for people that they can get away with, and they will continue to do so until we stop treating them like pharoahs.

*sigh*

Before I took this job, I was pretty moderate about this situation…I figured both sides were to blame, and that the market would just have to work itself out, and it was too bad that some people were going to suffer, but they should have been more careful. I’ve since learned that it isn’t even close to like that. Banks caused this, eyes-wide-open, and they’re doing everything they can to avoid regulation by making it seem like it was the victims’ faults.

Sometimes I try to think of something more despicable than what these people have done, to this country and its citizens, the customers they promised to act in the best interests of in exchange for huge sums of money…family-money, single-parent money, money that could have bought medication or saved for college…money they took and ran, leaving their executives still collecting huge bonuses, and hard-working families without a home to live in…and you know, for all the words this brain of mine seems to produce without effort, it just can’t come up with anything worse than the reality.

I should mention that there was one excellent comment in the latest Consumerist thread on this topic, which actually inspired me to finally buckle down and write a post on this, even though usually, it’s taxing enough to think about it as often as I have to already. Here it is, shorter than my rambling and dead-on to-the-point. Thanks, CSchnack!

(Last thing–this is in no way the opinion of the nonprofit I work for, which is partly why I haven’t named it. They would agree with me, but I don’t have the right to speak for them here.)