I was delighted to open my Washington Post this morning and see that the Real Estate Section of the paper is now carrying the column by the Mortgage Professor, Jack Guttentag. I've been a regular to his web site over the past couple of years, and I'm glad that he is going to be made widely available here. I've always liked Guttentag because he is not solely a practical personal finance advisor nor an abstract economic theorist, but rather is a great combination of the two. Today's column is a gem . It takes on the faddish and confused proposals to impose the "suitability" requirement developed in securities law onto mortgage lending. Consider:
The case for a mortgage suitability standard looks both simple and plausible, and it appears to have been making headway in Washington. A federal suitability rule has worked in the securities industry, the argument goes, so why wouldn't it work with home mortgages?
One major difference between the two markets is that the securities market has only one problem to which suitability is directed: preventing unsophisticated investors of limited means from being sold securities that are too risky for them. The home mortgage market, in contrast, has multiple problems for which suitability has been offered as a remedy.
First he notes that unlike the securities market, suitability in the mortgage market is directed at the wrong parties to resolve the underlying problem. But then he observes the more fundamental point about trying to impose a suitability requirement in this area:
The objectives of mortgage borrowers, in contrast, are diverse, complex and often not known by the loan provider. Here are five objectives that have been reported to me by borrowers who have selected option ARMs and interest-only loans:
· Reduce cash outflow to invest the excess in securities.
· Reduce cash outflow to pay down a second mortgage.
· Pay principal when convenient.
· Buy more house.
· Reduce payment to avoid default.
I sometimes get involved in an exchange with borrowers about whether their objectives are worth the risk, and sometimes I express my opinion to them quite forcefully. I would not want the legal right to overrule them, however, because I am not that smart.
As I said, I've been reading the Mortgage Professor for years and I recommended him strongly for those interested in both the practicalities and policies of mortgage issues. I often agree with him and even when I don't he is always informative.