From CNBC’s Diana Olick: [Hat tip L!]
I was moderating a panel of two governors and an economist today on the foreclosure crisis. It was much of the usual stuff until Pennsylvania Gov. Ed Rendell made a bold proposal.
He said that in addition to the legislation making its way through Congress to save troubled borrowers, there should be additional provisions that protect borrowers from having their credit rating destroyed when they go through foreclosure.
I understand where he’s coming from. “This is not for people who took risks,” he says. “This is for people who were legitimately duped by unscrupulous people.”
He wants all those borrowers who were the victims of predatory lending to get a clean, fresh new start, and I can see where that is a very good, sound argument.
It’s just not practical. For many many months I’ve heard many many policy-makers, lawmakers, and decision-makers argue for the good of those poor borrowers who were tricked into faulty mortgage products. They paint a picture of not ignorant, but perhaps uneducated folk who truly believed that they were buying into a sound financial scenario.
But the fact of the matter is that a lot of borrowers, and not just the speculators, went in with their eyes open. They were told that their loans would adjust and that they could refinance based upon the current rate of appreciation. They bought into that appreciation; they gambled on it.
My take is that foreclosure has traditionally not been "fair". Credit scores are not designed to be a measure of borrower’s honesty, but a measure of the risk involved in lending to a borrower. Typical reasons for foreclosures in the past included illness, job loss, death of a spouse- not "failed flips". Lenders have looked at these incidences of financial stress and determined that these problems, however undeserved, raise the risk of default, and credit scores have been gauged accordingly. If borrowers are not sophisticated and are "duped", it seems unlikely that they are a better risk than the speculators.
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