A Look at the Evidence: Predatory Lending, Borrowing, and Jack Cashill

The opening chapter of Jack Cashill’s Popes and Bankers relates his version of the tale of Melonie Griffith-Evans, a woman who in 2004 borrowed her way to losing her house.  Ms. Griffith-Evans accepted loans in order to buy a house priced at $470,000 that resulted in her having to pay “roughly $3,500 a month.”  Of course, she ends up not being able to pay those loans, and—since ex post is ex ante—the result must be All Her Fault.  Mr. Cashill allows as to how a “traditionalist” might “if feeling churlish, talk of  Griffith-Evans as a ‘predatory borrower.’ ”

Working solely from the information as provided by Mr. Cashill, let us test the validity of his hypothesis, assuming the “traditionalist” were sane.

Taking Mr. Cashill at his word on that “roughly $3,500 a month” and assuming that the ancillary loan is described correctly, Ms. Griffith-Evans would have to have taken out the following loans to buy the house for $470,000:

1. A $  94,000 (20% of the price of the house, an amount Ms. Griffith-Evans did not have in savings) loan.  This loan—which I’m guessing was for 30 years was offered at the rate of 12.5%.  (Mr. Cashill stipulates this.) Presumably, it was not secured by the property itself.
   1. This would produce a payment due of approximately $1,000 per month.
2. A $376,000 (80% of the price of the house) 30-year fixed-rate mortgage, securitized by the property, at 7.00%
   1. This is the only way to total $3,500 per month if we assume Ms. Griffith-Evans borrowed the entire 20%, which seems to be Mr. Cashill’s contention.  Otherwise, she only borrowed around $57,000 and made a down payment of around $35,000—certainly not the actions of a “predatory borrower.”

All of this excludes the closing costs or title searches or inspections or any of the other minutiae that is required before such loans are approved. But the process is transparent in Mr. Cashill’s tale, so we should assume that is the way he wants it to be.

Strangely, the details Mr. Cashill offers do not jibe with that. He claims that Ms. Griffith-Evans “took out a fairly standard 8.5% loan on 80% of the purchase price.” And—in a case of poor writing that betraying poor thought—he collaterally notes that the $3,500 payment due was “increasing as the loan was adjusted.”  This would lead to an initial combined payment of approximately $3,900 a month—more than 10% higher than “about $3,500,” though still significantly below the rental costs of “about $5,000 to $6,000 per month” for apartments that, per Mr. Cashill, “suited her fancy.”

Mr. Cashill is determined to argue that the loan Ms. Griffith-Evans took out was not “predatory,” but was an 8.5% mortgage rate “fairly standard” in 2004?

It doesn’t seem to be. Even the highest rate for conventional mortgages in 2004—6.29%—is  more than 220 basis points (2.20%) below the rate of Ms. Griffith-Evans’s loan, and that is excluding whether her rate was itself adjustable.  (It is unclear from Mr. Cashill’s account whether the 8.50% mortgage, the 12.5% additional loan, or both were adjustable.)  Or, to put it simply, the lender was charging Ms. Griffith-Evans more than a 35% premium for her loan.  Quite a premium to accept if one wants to be a “predatory borrower,”

One might fairly wonder why she was not offered a loan for the entire amount at a fixed rate that would produce a loan payment due of about $3,500 a month, eliminate the risk to the second, unsecured lender, and leave the primary mortgage lender with a less encumbered “owner.” (That rate would be 8.10% for a $3,500 per month payment, or—given Mr. Cashill’s figures—a loan of 9.30% for the entire amount.) Certainly, if the primary lender honestly believed the property was worth $470,000, they would have been willing to offer a loan for such an amount, with the attendant Mortgage Insurance.

Mr. Cashill wonders about none of those actors, either, however. Tis Ms. Griffith-Evans who is wholly at fault, from the Very Christian perspective presented.  Somehow, it was venal of her to elect to pay $3,500 a month for a house for her family, instead of half again more for an apartment.

I raise the possibility that the primary lender didn’t believe the house was worth $470,000—or even anything beyond $375,000—solely because the evidence runs that way.  There is first the fact that the lender was not willing to loan Ms. Griffith-Evans the entire amount—or even within 20% of  it—against the value of the property. (We can safely conclude this because the alternative is to believe that she, given the choice between paying 8.5% and paying 12.5%, honestly preferred the latter.)  The second piece of evidence comes from Mr. Cashill, who declares that the lender was “embarrassed” into allowing Ms. Griffith-Evans and her children to stay in the house—“presumably free of charge” (quite the presumption, that)—“while she tried to find a buyer.”  (Those of us who do not understand this behavior from a “predatory borrower” probably don’t understand Christianity either.)

Do I need to note that she failed to find a buyer? And that the lender clearly didn’t have one either, for—as Mr. Cashill continues—“When she failed to find one, the lender gave her still more time to find an apartment.”  The benevolence of lenders is legendary, to be certain, but this one is clearly destined for sainthood.

The world in which I live—clearly one with a different color sun than that of Mr. Cashill in this chapter—is one in which businesses make decisions based on revenue and cash flows.  So when the seller of the house accepted Ms. Griffith-Evans’s original bid, even with its dodgy financing, during the peak of the housing market, we must presume that they did so because they expected to receive more net money, easier, from that sale than from any other bid.  And we must presume the lender was fully aware of what they were doing—and charged usurious interest rates (compared to the market) accordingly.

So we have a situation in which, ex ante, all parties got the best deal they could, given the information they had.  Ms. Griffith-Evans paid around $1,000 a month less than she would have paid in rent, even  before any tax benefits.  The seller received a price to which they agreed, and which they represented as fair market at the time—with a lawyer doing a title search, a home inspector, and a home appraiser all corroborating that the property and the structure were as represented, and that the price was reasonably on the market (even if it wasn’t, or soon thereafter was not), all of whom were paid for their expertise and conclusion.  The lender received a significantly higher interest rate than they would have from another buyer, which presumably compensated them for their additional risk—and they had the property in reserve.

In the world in which the sun is yellow and Ms. Griffith-Evans is a single mother—not General Zod—economic agreements were reached consensually among the parties and of whom except Ms. Griffith-Evans were compensated professionals. Strangely, in the “traditionalist” world of Mr. Cashill, the one person in the entire series of transactions who is most likely to have been deprived of information is the one who should be described as “predatory.”

After a start like this, I can’t wait to read the rest of the book.