Yesterday I blogged about the unintended consequences of the federal government’s mandate that Stafford student loan interest rates would not double as scheduled on July 1. Organizations such as the Jubilee USA Network praised the government’s action as an act of Christian charity towards students who were oppressed and taken advantage of by unscrupulous lenders. The phrase “predatory lenders” has been coined to describe entities that intentionally deceive borrowers into accepting loans they won’t be able to repay without going bankrupt. This is the accepted narrative, and is certainly what the Jubilee USA Network would like us to believe is true. However, this may not be the whole story.

In a working paper called “Complex Mortgages,” a group of four economists studied the differences between traditional mortgage borrowers – who paid down their balance over time – plex mortgage borrowers, and found considerable evidence that suggested that plex mortgage borrowers may have gone into mortgages fully intending to default. Thus the paper coined the term “predatory borrowers.”

The paper found that people who defaulted plex mortgages were more likely than traditional mortgage borrowers to be highly educated and more highly paid, and to have higher credit scores, and they often defaulted even though they were not suffering financially. Complex mortgages are also more frequent in “non-recourse” states, where borrowers are legally protected from being pursued by lenders.

In summary, many mortgage defaults were not the fault of unscrupulous lenders, but rather, of unscrupulous borrowers. The accepted explanation for the housing bubble may only explain a part of the problem. If so, it is a sign of the moral laxity of our times that so many people seem to have no qualms about entering into agreements they fully intend not to keep.

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