Those newfangled mortgages from 2005, they’re threatening to negatively impact some individuals. But don’t worry, government wants to save everyone.
… But as mortgage defaults rise, the new Congress and several state legislatures are contemplating enactments that would require mortgage brokers and lenders to make sure a loan is “suitable” for a borrower–just as stock brokers have to make sure an investment is suitable for a client. Your loan officer would be required to ask a series of detailed questions about things like your financial goals and your tax status. And if the loan was inappropriate, the lender would be open to a lawsuit–and even a prison term.
That should work wonders on the mortgage (and by extension, the housing) market. Screw up according to some bureaucrat’s unclear standards and whammo, prison bars for you. Wonderful.
I’m all for fair disclosure requirements, but I also understand that that’s what contracts are for. I understand enough finance from my education that I could walk my way through buying my first house with little trouble on the specific terms. Adjustable versus fixed rates, interest only, whatever. I faced all of those questions. The answers were obvious enough to me because I did my homework. But I also hired an attorney to work through everything and verify that the contracts matched expectations.
I don’t pretend like everyone has that knowledge, or even that every mortgage broker has any scruples. I can’t believe that those require this level of anti-market glee:
The mortgage industry doesn’t object to the congressional intrusion, since a federal law might be preferable to a patchwork of state laws (though the industry would have preferred a Republican-run Congress). Consumer advocates are now happily taking their case to a Democratic Congress, and they don’t deny that what they propose could crimp profits of lenders and of investment banks that securitize home loans. “It would eat into returns and presumably investors’ appetites, too,” says Keith Ernst of the Center for Responsible Lending in Durham, N.C.
Presumably.
The ramifications are simple, really. Reduce the profitability, and the providers will disappear. Then that low-income family that could just barely afford a house will be stuck renting. That middle class family looking to trade up? Maybe next year. Even if they can properly assess their risk and potential to repay the loan(s), they won’t be able to do so because the government cares so much.
Remember, of course, that the logic works the other way. Lend without common sense and your borrowers will go kaput. If the lack of judgment is large enough, the company will go kaput. This is how the market works to achieve balance. Lenders and borrowers alike have a built-in incentive to behave responsibly, even if they ignore that incentive. Beyond the basics of honest disclosure, handcuffing the market is just meddlesome misbehavior that will fail to protect people from themselves.
There’s a sotto voce presumption here by the politicians that banks somehow like foreclosures, as though they were all Silas Barnaby’s trying to seize the Shoe from Mother Peep.
Banks are not in the business of owning defaulted real estate. They are in the business of making loans that are repaid. They have all the incentive they need to try to make only reasonable loans to people probably able to repay. Threats of criminal penalties won’t change that. It will only make mortgages harder to get, and more expensive, for all.