More Mortgage Madness
December 17th, 2007 by Peter SudermanIt’s been noted that one of the reasons the mortgage industry decided to play along with Bush’s “voluntary” rate-freeze plan for mortgages is that they hoped to shield themselves from further regulation. That may be true in the short term, but that doesn’t mean that liberal legislators aren’t still going to come after the industry. As an old boss used to say: “You can’t get rid of the crocodile by feeding him your leg.” There’s no appeasing these people. And, like clockwork, here come Sens. Barney Frank and Christopher Dodd with a new set of regulations for the mortgage industry:
Mr. Dodd’s proposal would bar specific practices in subprime lending like prepayment penalties, which borrowers have to pay if they try to refinance or pay off their loans early within a few years, and yield spread premiums, which are commissions lenders pay to brokers for persuading borrowers to take out a higher-cost loan than they could qualify for.
Now, I can imagine a lot of people not objecting to any of this. But let me make two observations.
1) Does the consumer always have an absolute right to the best deal? I think the answer is obviously not. In cars and computers and diamonds and fur coats, buyers and sellers work out deals that are mutually beneficial. If someone pays a particular price for something, it’s (obviously) because they’re, well, willing to pay it. Sometimes that means the seller gets higher margins. Sometimes now. Now, in a healthy, competitive industry not burdened with excessive regulation, those prices will eventually fall and reach a natural equilibrium. But the way to get there isn’t by mandating selling practices.
2) The proposal represents a pretty severe attack on freedom of contract. It would ban agreements made between employers and employees — presumably some which are already in place — and it would ban particular types of agreements between buyers and sellers. Why shouldn’t a buyer be allowed to agree to a specific payment plan and then face penalties for altering it? Mortgage banks count on scheduled payments and the income (and, yes, interest) they provide in order to make their money. If a buyer agrees to lock into a payment schedule, why should the bank have to readjust to let them?
None of this is to argue that every single mortgage transaction in the U.S. over the last decade or so has been perfectly kosher. But this sort of regulation of the industry is unwarranted, and potentially quite damaging.
December 17th, 2007 at 7:27 pm
I don’t think you understand how mortgages work. These aren’t really 1-on-1 contracts negotiated by both sides in good faith. Mortgages are commodities which are purchased (the banks themselves even call them “Mortgage Products”) with little wiggle-room. You don’t get to just negotiate away things like prepayment penalties; the bank will just tell you to take a hike. Buyers out there aren’t “allowed” to agree with payment schedules, they’re compelled to do so.
But more than that, you clearly don’t understand the whole of the so-called “mortgage crisis.” You haven’t examined why the banks were offering these risky sub-prime mortgages to begin with, how those deals effected mortgage-backed securities (which are tanking and may require a taxpayer-funded bailout). You clearly don’t see how the big banks stacked the deck against consumers and directly helped precipitate the mortgage crisis, which is what this is essentially about.
December 18th, 2007 at 12:48 pm
This mortgage bailout is nothing more than social welfare for ignorant and irresponsible consumers. Why are most consumers ignorant? Because most people don’t even understand, nor have they learned in high school, college, or life, the basics of finance and how ARM mortgages work and the subsequent implications of having such an ARM.
Why are consumers irresponsible? Because, just like with car leases, most people in America will opt for the path of least resistance to live beyond their means, as long as someone allows them to do so - eg. car leases and ARMs.
Some may say, its the banks’ fault for “preying” on these poor souls. I say these are adults that should not sign anything unless they have read and understand it fully. So, who’s responsibility is it to read these people’s financial agreements and contracts….the federal government? If they can’t understand these documents and the terms, they have no business getting a loan in the first place. I know, why don’t we have a IQ test and not let anyone sign a contract unless they are smart enough to comprehend it? How is that for regulation?
I, for one, do not want my tax money used to subsidize their ignorance and irresponsibility.
December 18th, 2007 at 3:24 pm
Actually, Charles, your tax money will be used to bail out the banks. Mortgage-backed securities are now wreaking havoc in the financial sector, and taxpayer money is already being used to back worthless mortgage securities. That’s the fault of the banks for extending these mortgages to begin with, knowing they were unsustainable over the long haul but provided a short-term quarterly boost during the housing bubble.
Sure, consumers are losing their houses and most will not actually benefit from this proposed rate freeze. But the real problem isn’t the individual consumer, its the worthlessness of mortgage-backed securities and the widespread purchase of debt. For instance:
and
note also:
and this:
This is just as much the fault of the banks lending the money as the people taking it. The banks risked it all, banking on the mortgages being insured for losses. But since the losses were so great, the insurers are going bankrupt. Now there’s no money there, and the federal government is now in the business of buying up this worthless debt from the banks, at taxpayer expense.
Charles, you have this ALL WRONG, as does FW/CSE. Most of the defaults are investor purchases. The rest are regular citizens who want to stay in their homes and pay their loans off but can’t. Citibank is poised to cut 32,000 jobs over this.
Don’t get caught up in the rate freeze or helping out people with their mortgages with taxpayer money. It’s a drop in the bucket compared to how much of your tax dollars are now being spent to prop up the banks.
December 18th, 2007 at 4:48 pm
How about this, Charles?
Back in September, WSJ reported
December 19th, 2007 at 12:37 pm
And now this from AP:
Looks like I spoke too soon. Seems it’s the Chinese government keeping our major investment banks afloat, not ours. Surely that’s not a good thing, eh?
February 10th, 2008 at 4:50 pm
Let’s face it the current mortgage mess was created by greed pure and simple and I feel that the home buyer had a right to be protected aganst the predatory tactics of the mortgage brokers, the mortgage lenders and the bankers and market manipulators who securitized the sub-primes and promised safe high returns. Meanwhile the larger fish profit by buying out the weak sisters and using their losses to offset taxable income. Double or is it triple whammy?
February 25th, 2008 at 7:41 pm
What’s such a big deal if homes are foreclosed? Hint:RENT IS CHEAP. Do not confuse this with homelessness.
March 6th, 2008 at 2:47 pm
The greed of the ignorant and the greed of the schemers collides.
June 6th, 2008 at 12:30 am
It’s getting harder to obtain commercial money as well. The rental market will do well in this market.
September 25th, 2008 at 9:29 pm
A mortgage requires you pay a steady amount of money every month plus interest, without delays. Assess your financial capabilities to pay before availing of a home loan.