Halacha Meets the Subprime Market

Being completely unschooled in the dismal science, I have nothing to say about the economic mess major parts of the very intertwined world finds itself in at the moment. In lieu of analysis, I offer a single anecdote, without comment. Readers can take from it what they wish.

A short few years ago, a young kollel-trained man had gotten some experience finding mortgages for prospective house buyers. Looking to improve his bottom line, he sent out feelers to various mortgage brokers. Each interview seemed to cover the same ground. A company representative explained the extremely liberal terms and the loose requirements for obtaining the loans they were offering. Moreover, each company threw in a similar pitch to the prospect, about how they could obtain a house with payments so affordable that he or she would still have money left for vacations, etc.

The young man was skeptical. How could the lender possibly afford such terms, and with such poor risks? Again, the answer was the same at each asking. The companies did not hold on to the mortgages, but quickly sold them to larger institutions that were free to change the interest rates. The trick was to convince people who thought (pretty much correctly) that they could not afford a house that the opposite was true. Once they took the bait, they would be locked in to escalating terms.

There was no deception involved. Borrowers were told that the rates could change. They were nonetheless enticed by the opening offer to get into something that would prove to be over their heads.

The young man was troubled. The pitch did not sound so kosher. So he found an opportunity to ask Rav Shmuel Kamenetsky shlit”a what he thought. Rav Shmuel said, “It’s assur – forbidden!”

The young man thought that Rav Shmuel perhaps had not grasped all the elements, so he emphasized to him that the borrower was not deceived, that the lender explained that the original rate would likely change. Rav Shmuel, however, wouldn’t budge. “You are giving him advice that is not in his interest. That is assur.”

The young man thought that Rav Shmuel was perhaps instructing him in some ethical nicety, going beyond the minimum requirements of black-letter law. So he kept pushing. He told Rav Shmuel that he needn’t worry about impacting members of the community. The mortgages were offered outside of the community, to strangers, where presumably it would suffice simply to obey the law.

Rav Shmuel held his ground. “It doesn’t matter to whom you are offering the mortgages. You are giving them bad advice. It is assur.”

The young man found a different line of work.

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11 Responses

  1. Adamchik says:

    The investment management folks (i.e. financial planners or brokers selling you mutual funds) are very concerned with “investment suitability” when choosing investments for clients. They are afraid that you might lose a lot of money, and sue them later, so they want to try to make the investment choices a reasonable fit.

    However, the more heavily-regulated (retail) banking world is more concerned about disclosure (did you clearly the client that the rate could go up?). Since the loans were sold and resold, there is much less of a feeling of accountability for any recommendations.

    Some financial observers say that dishonesty is at the root of our current financial mess.

    Kovod Harav!

  2. Chaim Fisher says:

    How nicely explained.

    And how quickly was Divine punishment exacted from the wrong-doers. Visit your local river to see the heads of all the crooks and semi-crooks who put together this sub-prime scam floating by one after another.

  3. joel rich says:

    It’s also a telling commentary that a story which reflects such basic halacha needs to be told as a seemingly novel insight.
    Joel Rich

  4. Big Maybe says:

    This has nothing to do with dishonesty. Bad advice is prohibited by Lifnei Iveir. The institutions should not have facilitated the bad loans, and they share some blame for the current crisis. But in the end, the primary responsible persons were those who took loans they couldn’t afford.

    לוה רשע ולא ישלם

    Refers also to one who take a loan he knows he cannot repay.

  5. dovid says:

    Dear Rabbi Adlerstein: Thank you for telling over this incident and showing Rav Shmuel Kamenetsky’s intransigence and abhorrence in the face of an עוולה. We are often tempted to be מורה התר לעצמו, to judge ourselves charitably and search for excuses to perpetrate actions against Jewish law and against the law of the country. Praiseworthy is the “young kollel-trained man” who had the strength of character of asking a most qualified person how to conduct himself in business. He didn’t choose to go to someone who may have found some “leniency” in advising a faceless client to commit financial suicide.

    “The young man thought that Rav Shmuel was perhaps instructing him in some ethical nicety, going beyond the minimum requirements of black-letter law.”

    This statement, unfortunately, reflects the attitude of many brokers, attorneys, doctors, etc. who are delinquent in their fiduciary obligations of giving the best advice to their client even if this would result in their losing the deal.

  6. Garnel Ironheart says:

    As Rav Salanter, zt”l, once noted: the world is like an expensive hotel. Every luxury must be dearly paid for.

    Including the physical, it would seem.

  7. dovid says:

    “Visit your local river to see the heads of all the crooks and semi-crooks who put together this sub-prime scam floating by one after another.”

    I only see the skulls of (1) those who bought houses they could ill afford and (2) the shareholders and stakeholders of insurance companies and pension funds that invested in mortgage-backed securities that were secured by assets worth considerably less than their stated value. The skulls of (a) the brokers and mortgage bankers who knowingly originated bad loans and (2) that of the investment bankers who knowingly packaged and marketed mortgage-backed securities that were not worth their nominal value are not floating in the river. Thus far, they got away free.

  8. Bob Miller says:

    Unfortunately, the social compact by which America has been governed lately (and don’t leave Congress out of this) is:

    1. The politicians agree to lie
    2. The citizens agree to be lied to

    Without Item 2, Item 1 would never have caused so many problems.

  9. Ben Tzion says:

    How many times during the week of selichos and Yom Kippur do we say אשמנו בגדנו…יעצנו רע. Yasher koach to the writer and to Rav Kaminetsky.

  10. LOberstein says:

    Wachovia was a small North Carolina bank that bought up other banks and became huge,now it is being bought by Wells fargo. As banks stopped holding on to their loans and sold them to investors, it became further from the community. Everybody along the way was making money on the deal and there was every incentive to pass the loan on.When the borrower defaulted, it wouldnt be the lender’s problem. Now the stock market fell over 2,000 points in a week! I never imagined this would happen. I hope that the next administration puts alal of these shady practices under a microscope and puts into place reasonable rules. Greed got us into this mess but we need good government to help us out. This crisis has pushed me back into the Democratic Party. I hope a new broom will sweep clean, a young President with21st century ideas who will lead our country out of systemic problems that can sink us all. We must develope renewable energy sources.We can’t allow our country to be bought by the Arabs, it certainly isnt good for the Jews or anyone else.
    Those who wallow in conspiracy theories and care more about tarring Obama than getting a new administration have lost, they just can’t admit it.Have a great holiday.

  11. dovid says:

    LOberstein, it appears to me you follow the crowd, no matter what the crowd consists of, no matter where the crowd is rushing. Yesterday, it was the stock market. Now, it is the young, 21st century president hopeful. With your permission (or w/o), I will invite you for a re-evaluation of the situation. I hold that just as the stock market crushed, America with Obama will crush. Your saying “I never imagined this would happen.” would not help the situation. With your vote, you made it happen.

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