Demonizing The Mortgage Industryby Doug Mataconis
In today’s Chicago Tribune, Steve Chapman points out the hypocrisy that has been exhibited by many on the left in response to the problems in the sub-prime mortgage industry and the increasing number of foreclosures on such loans:
In the old days, financial institutions that refused to lend to people with low incomes or imperfect credit were accused of victimizing the needy. Today, financial institutions that make many loans to those same people are found guilty of the same crime.
Back in the 1960′s and 1970′s, lenders who refused to lend to people with risky financial portfolios were accused of “redlining” — which was the supposed practice of refusing to lend to anyone within certain geographic areas, usually areas dominated by minorities — or of outright racism in their lending practices. In reality, what lenders were usually doing was responding in a rational way to both the prospective borrowers in question, and the rules and regulations they were forced to deal with.
First of all, poor people, whether they’re minorities or not, are not good credit risks. They aren’t regularly employed, they don’t have significant assets, and they usually have financial obligations that make the idea of being able to meet a mortgage payment often unrealistic. Lending someone in such an economic state hundreds of thousands of dollars to buy a home would be an incredibly stupid business decision, unless the loan were structured in such a way as to protect the lender from the increased risk of default.
And that’s where # 2 comes in…….
Second, because of banking and lending regulations in the 1960s and 70s, lenders were often restricted in the terms they could offer to borrowers. Interest rates, typically the best way of counteracting credit risk, if not capped, were at least highly regulated, and banks were not permitted to offer anything much more than the typical 30 year fixed rate conventional loan.
When the mortgage industry was deregulated, thanks in part to the people who were complaining about so called “redlining” and discriminatory lending, lenders were able to non-traditional mortgages that permitted people who otherwise would have been locked out of the opportunity to purchase a home the ability to do so. One can argue about whether or not people like this are making the right choice when they take on the responsibility of home ownership, but they’re all adults, and, in the end, they’re the ones who accept financial responsibility when they sign on the dotted line.
As Chapman points out, the mere fact that some of these subprime borrowers are defaulting on their obligations is not a condemnation of either the subprime market itself, or the mortgage industry as a whole:
[T]he fact that some borrowers are behind on their payments is no condemnation of the system that furnished them credit. They are in the subprime market, after all, because their credit history or income suggests they are bad risks, and it’s no shock to find that some of them turn out to be exactly that.
Precisely, and more importantly, all the press about the increase in foreclosures among such borrowers ignores a broader reality:
[T]he overwhelming majority of subprime customers handle their obligations just fine. At last count, fewer than 14 percent of them were delinquent, meaning that 86 percent were not. Most people pay what they owe, and those who don’t suffer the consequences. Absent consequences, fewer people would repay, and mortgage providers would demand higher rates to lend to the remainder.
And that, ultimately, is what the free market, individual liberty, and being an adult in a free society are all about — accepting the consequences of your actions.
But it doesn’t, unfortunately, end there. Details below the fold:
Instead of letting the system work itself out, though, Democrats like Senator Chuck Schumer insist that the state must act:
Schumer hopes to avert future foreclosures by insisting that homeowners demonstrate they have the income to afford not merely the initial payment, but the highest one they eventually will face. He also plans to spare current borrowers by spending tax revenues for their benefit — as well as vigorously pressuring private financial institutions to “direct resources” to this worthy end. The money would go to non-profit entities, so they can help debtors and creditors reach terms to prevent foreclosure.
Lenders already have good reason to work out bad loans, so they don’t get left holding a property that, in today’s market, may be worth less than the mortgage. If it’s true, as Schumer claims, that many borrowers could qualify for cheaper loans, they are free to go get them — and mortgage brokers have ample incentive to seek those customers out. The senator’s bizarre assumption is that absent federal intervention, these parties will blunder around without a clue.
In fact, most of them know what they’re doing. A recent study for the National Bureau of Economic Research found that thanks to improvements in the mortgage market during the last 35 years, “Households are now more able to buy homes whose values are consistent with their long-term income prospects.”
But, you see, Chuck Schumer thinks he knows better than you do what’s in your best interest.
That is precisely what collectivism is all about.