Arnold Kling  

Subprime Daily Briefing, Dec. 26

Ron Paul: My Two Cents... The Old-Fashioned Personality...

Just one lame op-ed.

Michael S. Barr, Sendhil Mullainathan, and Eldar Shafir write

Eligible borrowers would be offered a standard mortgage (or set of mortgages) and that’s the mortgage they would get — unless they choose to opt out in favor of another option, after honest and comprehensible disclosures from brokers or lenders about the risks of the alternative mortgages. An opt-out mortgage system would mean borrowers would be more likely to get straightforward loans they could understand.

...if default occurs when a borrower opts out, the borrower could raise the lack of reasonable disclosure as a defense to bankruptcy or foreclosure. If the court determined that the disclosure would not effectively communicate the key terms and risks of the mortgage to the typical borrower, the court could modify or rescind the loan contract.

That may be a solution for predatory lending. But the problems of predatory lending have yet to surface. We are seeing loans defaulting within 12 months of origination, with no interest-rate resets. The problem there is predatory borrowing--we have people living in (or speculating in) houses that they are not qualified to buy.

The big misunderstanding is not over the terms of the mortgages. The really serious misunderstanding, which applied to lenders just as much as to borrowers, is that house prices do not always go up.

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COMMENTS (2 to date)
Gary Rogers writes:

I could not agree with you more, but that will not stop politicians from demonstrating how much they care about the common man by attacking the "evil" lenders. There will undoubtedly be some bad legislation come out of this mess. The good news is that the Fed and other central banks seem to be doing a good job of providing enough liquidity to keep everything running and this will hopefully blow over in the next six months or so.

Babinich writes:

I've read that the House version of the FHA modernization bill would allow FHA applicants to obtain loans with zero percent down. I believe three percent down is currently the minimum amount accepted.

The Senate's version would require down payments of at least one and a half percent.

The House bill authorizes the FHA to vary insurance premiums according to risk factor of the applicant; borrowers who make minimal or no down payments could (and in reality would) be charged higher premiums.

How is this scheme any different than the lending practices implemented by the private sector that got us into this problem in the first place?

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