Blaming the Subprime Victim

Posted by: Gene M. | Mar 03,2008


There’s a meme building about the subprime mortgage meltdown and the credit crisis that it’s entirely the consumer’s fault.  The basic line of reasoning is: these people got into a mortgage that they clearly couldn’t afford, so they’re at fault for any financial hardship.  The same thing goes for credit cards: they should have read the fine print on their agreement.  In short, it’s a way of blaming the victim.  

Except it’s important to see just how people got into both bad mortgages and bad credit card plans.  Many homeowners were offered a low introductory interest rate that then ballooned to an unmanageable 11% or more after a few years. What makes lenders veer into “predatory” is that these borrowers were not informed about how the mortgage would change down the line.  So while you could argue that these borrowers should have read all of the fine legalese on a mortgage agreement, a lot of people were taking the lenders on their word: lenders who were saying, basically, look at this interest rate, isn’t it great, but failed to stress what interest rates would look like in the future.  

If this was mentioned, the lender may have stressed that because the homeowner had built up so much equity due to he low introductory rate that it wouldn’t matter if interest rates eventually went up.  What the homeowner didn’t count on was the fact that home values suddenly plunged, making that initial equity much less valuable.  

Credit cards have worked in the same way.  Credit cards have a similar low introductory rate .  Most credit cardholders do realize that the introductory rate will end after a pre-determined period – this information is clearly advertised.  What cardholders might not realize is that a credit card company can raise rates “at their own discretion,” regardless of how responsible the cardholder has been.  Most every credit card has this clause.  Factor in the fact that interest rates can go up exponentially due to one default – even if the bill is one minute late on the due date.  Also, factor in the Universal Default clause, in which credit card interest can go up if you default on an unrelated bill.

All of these issues are in the fine print, but their confusing to say the least.  So to claim that this is entirely the cardholder or the mortgage borrower’s fault is not entirely accurate.  You can be increasingly diligent about reading the fine print, but when the housing market collapses through no fault of your own, and credit card rates go up even if your paying your bills on time, I think borrowers should be given the benefit of the doubt.  If there’s one good thing that’s come out of the current credit mess, it’s that people are going to be a lot more careful before signing on the dotted line.  

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