As is no surprise to anyone who owns a home, is looking to own a home, or is paying attention to the news for the past several months, the home market is not doing well. See this article. As was recently reported on NBC Nightly News, homes may depreciate this year for the first time since the Great Depression. That mortgage companies are tightening lending even for qualified buyers will not help, as people who cannot get mortgages cannot buy houses. As anecdotal evidence, some friends of mine have had their house on the market for several months now and have it priced so that they will merely break even. Total showings: 1.
My spouse and I have discussed who is at fault for the current housing woes. Is it the mortgage companies and banks for offering (and often pushing) low interest adjustable rate mortgages and approving sub-prime applicants, often without checking debt-to-income ratios? Is it the consumer for being foolish, risky, and / or ignorant in taking such loans? Or is it the government for not regulating mortgage lending to a greater extent?
My gut reaction is that blame, if it needs to be assigned at all, can be spread all around. First, American consumers have a certain talent for accumulating debt without carefully evaluating the consequences. While it should be noted that mortgages companies probably should have done a better job being honest with applicants on the pros and cons of their mortgage products, such information is readily available from multiple free and independant sources (especially on the internet) should anyone care to look.
However, this does not excuse mortgage companies for failing to be honest and forthright with their clients. There have been numerous reports indicating a great deal of unfair or deceptive practices in the mortgage industry during the housing boom of the last several years. At the same time, mortgage companies which did educate their clients should not be blamed if those clients still made poor choices. During the housing boom, many buyers purchased more house than they could typically afford because of the availability of low-interest adjustable mortgages, fully aware of the consequences, but took the risk that they could sell or refinance before the interest rate rose too high.
As for whether the mortgage company should have offered these products in the first place, I think these products were a result of our free market economy. There was a demand for low-interest rate adjustable mortgages, so the mortgage companies met that demand. Assuming all parties understand the risks (and I acknowledge that this is not always the case), I see nothing inherently wrong with this. Looking toward the future, however, I think the problem will be self correcting. Since these mortgage companies are now losing a great deal of money, they will quickly change course, executives will be let go, and new executives will promise the shareholders "changes in policy," which will undoubtedly include no more adjustables.
Government regulation tends to be a topic that depends on one's politics. While I think that the government should be concerned with unfair trade practices (and should punish those companies which participate in such), I am not sure that it is necessary for the government to forbid lenders from offering a particular type of loan if there is a market for it (and assuming that market has access to knowledge about the risks involved). Further, our free market economy tends to favor non-regulation over regulation, and, as noted above, the free market economy tends to self-correct these kinds of problems. Finally, I will gladly attest (as a former loan officer and manager for a national bank) that the lending and banking industry is already one of the most highly regulated and that such regulations tend to be a double-edged sword (while they may offer some increase in consumer security, they will result in a very large increase in industry costs, which is always passed to the consumer).
2 comments:
This is one of those things that is a big ugly cycle that its hard to know what part to break into to stop it. This maybe completely obvious, but I think the reason these loans became so popular was because of astronomical housing markets found on the "coasts" and other urban areas. It is simply getting harder and harder to find affordable housing in places like DC, New York, and California. In Maryland it was fairly common for people to have these loans, it was the only way to afford owning a house. And I would say some of these people weren't being extravagant in their housing choices either. I do think though, like you stated, it could work itself out. But unfortunately having homes depreciating in value will be part of the process.
I have mixed feelings on government regulation in cases like this one, but I wonder if there needs to be restraints placed on free market economies in order to protect people. The problem with a free market system is that it will always be ruled by greed - decisions are made based on what creates the most money for myself, not on what is best for people. And this, I think, is where calls for regulation comes in. Sure, you could say that it is the consumer's responsibility to protect themselves, and to an extent that is absolutely true. But the more complicated these markets and the products they offer become, the harder it is for a normal person to truly protect themselves, even if they're trying to do so. Perhaps things do eventually right themselves - but how many broken lives are left on the side of the road in the process?
Not saying that government should regulate - just thinking aloud here. Government can't do everything, and sometimes we act like it can. But I like to think that there is some way to rein in the greed inherent in a free market system.
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