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Congress Is Making It Harder to Obtain or Refinance a Mortgage.--

For years, Congress had been pushing lenders to lend vigorously in poor neighborhoods and to avoid redlining. This effort worked--only too well.

Now Congress has discovered "predatory lending."

Jack Guttenberg (on Yahoo and in the Washington Post) has been criticizing Congress's efforts (H.R. 3915 the Mortgage Reform and Anti-Predatory Lending Act of 2007) to impose new requirements on lenders and brokers who repackage loans:

The tangible net benefit rule applied to loans being refinanced would make lenders responsible for something over which they have little or no control.

Virtually all refinanced mortgages provide tangible benefits — otherwise borrowers wouldn't do them. . . .

The problem is that, in exchange for the benefit, the predator extracts a pound of flesh. That's why the proposed legislation requires a "net" benefit, meaning that the benefit outweighs the cost. Unfortunately, there is no way that a lender can determine this. Whether or not the benefit outweighs the cost in any particular case depends heavily on what is in the borrower's head.

This will become clear from looking at the four main reasons that borrowers refinance: to reduce costs, raise cash, reduce monthly payments, and reduce interest-rate risk.

The Tangible Net Benefit in a Cost-Reduction Refinance

A cost-reduction refinance is one in which the new interest rate or mortgage insurance premium is lower than the existing one. In most cases, however, the borrower incurs costs upfront. If there is to be a net benefit, therefore, the future savings must outweigh the upfront costs.

But future savings depend, among other things, on how long the borrower expects to have the mortgage. This critical piece of information, if it is anywhere, is in the borrower's head.

The Tangible Net Benefit in a Cash-Out Refinance

Some of the worst market abuses arise on "cash-out" refinances, where the motive is to raise cash. Suppose that in raising $5,000 this way, John Doe has to accept a 7 percent loan as replacement for his current 6 percent loan, and $5,000 in refinance costs that are tacked on to his loan balance. The tangible benefit of $5,000 in cash is clear, but is it a net benefit?

There is no objective way for the lender to answer the question. The price seems high, but maybe the borrower needs the $5,000 to pay for life-saving medicine for his children? Again, the answer is in the head of the borrower.

It could be argued that whether or not there is a net benefit also should depend on the borrower's options. If the borrower could raise the $5,000 elsewhere at a much lower cost, the finding should be that there is no net benefit. It is neither feasible nor fair, however, to make lenders responsible for assessing their customers' options.

The Tangible Net Benefit in a Payment-Reduction Refinance

Some borrowers are willing to pay a stiff price, in the form of wealth reduction in the future, in order to reduce their monthly payments now. Frequently this involves converting a fixed-rate loan into an adjustable loan carrying a lower rate, often with an interest-only option, for a limited period. Costs are usually tacked on to the balance.

Whether there is a net benefit depends in good part on how critical it is to the borrower to lower the payment. Perhaps the alternative to a payment reduction is default. Only the borrower knows.

The Tangible Net Benefit in a Risk-Reduction Refinance

When interest rates are expected to rise, as was the case during much of 2005, many holders of adjustable-rate mortgages consider converting them to fixed-rate mortgages. The borrowers making the switch are willing to pay a higher rate now in exchange for future rate certainty. On this issue, lenders are in no position to substitute their judgment for the borrower's.

In sum, regardless of why borrowers refinance, the question of whether they receive a net benefit from it is for borrowers alone to answer. Lenders do not have the information needed to second-guess them.

This act would create new opportunities for lawyers to sue lenders and mortgage brokers for making or repackaging loans. This should raise the cost of borrowing and further restrict lending by banks and brokers. With a drop in housing prices and the need of many borrowers to refinance, substantially raising the cost of money may well make things worse rather than better.

Oren:

. . . to impose new requirements on lenders and brokers who repackage loans:


The key here is "repackage" which is a euphemism for (sometimes) passing off a shoddy loan as a good one. In this sense, the borrower is complicit in the scheme to sell his debt for more than it is presumably worth. Granted, he may be an unwitting accomplice but part of the banker's job used to be to firmly tell people that they are biting off more than they can chew.

On the other hand, sometimes the buyer is complicit in the fraud (often shooting himself in the foot for it). For instance, a popular scheme in Chicago was for a borrower and seller to conspire to hide the former's inability to put a down payment up by inflating the cost of the house and having the seller pay the down payment. Since a sizable down payment is a statistically good marker to ability to pay, the borrower can get a larger loan/lower rate than they would otherwise.

The banks used to have an incentive to investigate but now that they do not bear the risk of default (the loan having been sold off nearly instantly) they have every incentive to issue as many loans as possible, "flip" them onto the secondary market and collect their commission.

The worst thing about it is that the bad paper pushes out the good paper (as some famous economist said). Those with solid mortgage histories and reasonable appraisals of their houses will have to pay more because it is hard to sort out the good loans from the bad.
12.12.2007 9:22pm
MarkJ (mail):
Question of the Day: When have stupidity and willful ignorance ever been barriers to a long and prosperous political career in Congress?
12.12.2007 9:22pm
ReaderY:
Society is entitled to look at general social experience over the long term. It's true that some people may enjoy the subjective experience of fever or amputation. It's also true that most drugs work only for some, not for everyone. But these issues don't prevent society from having a workable concept of "health" and "efficacy" that enables it to evaluate doctors and drugs based on whether they provide momentary highs or long-term health benefits evaluated across large groups of people.

I don't see a difference between arguments that one can't tell if a mortgage is beneficial and similar arguments that one can never tell if drugs are efficacious because their benefits vary individually and people have different conceptions of what "health" is. Individual variation exists in almost everything society regulates: health here is no different from anything else. If the possibility of occassional individual variation is a legitimate argument against regulation, society couldn't regulate anything at all.

One might as well argue that insurance is a bad idea. After all, it doesn't work for everyone. Most people lose. It's only a good idea on average considered over society as a whole, because on average losing a small, sure premium is a smaller net loss of utility than a catastrophic loss with even a small probability. The fact that it doesn't work for everyone, and we can't be sure it will work for any given purpose, is a just plain bad against it. Lack of certainty is a silly argument because certainty never happens. We're never certain about anything. Every rule has exceptions. We can only work with what happens, on average, most of the time.

We can easily identify mortgages that are bad deals for most people most of the time. That's all that's required to justify any regulation at all. And it's all we ever get.
12.12.2007 9:54pm
JohnAnnArbor:
Congress was for it before it was against it.
12.12.2007 9:56pm
Mary Katherine Day-Petrano (mail):
Congress needs to add to the Act for all those states where the sea levels is anticipated to rise as a result of abrupt climate change due to global warming, a requirement that property sellers, mortgage companies, and lending banks disclosure the seal level rise risk to purchasers and/or those refinancing their mortgages. Why would anyone want to pay way too much for a mortgage loan if their property turns out to be a depreciating asset due to the timeline such property will be lost below the sea rise and rendered worthless?
12.12.2007 10:10pm
Mary Katherine Day-Petrano (mail):
corr: "disclosure the seal level rise risk"=disclose the sea level rise risk
12.12.2007 10:14pm
whit:
this is a typical example of unintended consequences. it's also a good example of why govt. meddling in free markets with good intent so often leads to bad results (i tell my democrat friends).

all markets are pricing mechanisms. the markets are pretty darn good at accurate pricing (in the long run) of risk, and allowing some to sell risk to others (think writers of options and buyers of options for instance, or the futures market)

and invariably those on the left tend to see this as an issue of EVIL CORPORATIONS taking advantage of poor victimized homebuyers.

as a libertarian, i tend to believe that people are responsible (generally speaking) for their own stupid, reckless decisions. any trader (myself included) learns and should know that overleveraging is DANGEROUS. that the increased benefits of leverage (and for most people, their homes are significantly leveraged. few people put 100% down). , come with increased risks.

all these bailout attempts are generally a bad idea. the market needs to reprice risk, let price regress to a mean (note price almost always overshoots the mean to the downside, just as it does to the upside. htat's the whole point - see: irrational exuberance and extreme pessimism).

i'd love to see the real estate market take a SERIOUS dive (it's only just begun). see: opportunity for cash rich investors.


what this comes down to also is bias. brokers are biased, lenders are biased, homebuyers are biased - based on what they want to see, and what situations would reward them REGARDLESS of what the underlying facts are. the market is always right, and it can remain irrational longer than any trader (or homebuyer) who tries to fight it can remain solvent.

it's ultimately an example of greed, hubris, recklessness, etc. and them chickens are comin' home to roost!

we are in the midst of a massive liquidity bubble. just look at the corporate bond market for an idea of how bad it is.

the signs of the market top and ridiculous exuberance were there: CNBC interviewing vegas strippers who had become successful speculators and flippers was what ultimately gave me the 100% sign on that account.

this kind of stuff has happened in nearly every market (commodities, tulips, stocks, etc.) and always will as long as people are not (as the dumb efficeint market theory posits) "economic man" but instead act as "emotional man"

and it's a GREAT thing. some will suffer, but those who work hard, and manage risk, exposure, and opportunity will make money and create wealth for everybody
12.12.2007 10:18pm
Jim Harper (mail) (www):
FYI - The WashingtonWatch.com page on H.R. 3915 has over 100 comments, mostly from angry mortgage brokers. The NPV of the bill (CBO score only) is a cost of a little over $4 per U.S. family
12.12.2007 10:36pm
Bruce Hayden (mail) (www):
The unintended consequence most likely here is that credit for those most in need dries up, or at least gets more expensive.

Also, to Oren, your suggestion that:
The key here is "repackage" which is a euphemism for (sometimes) passing off a shoddy loan as a good one. In this sense, the borrower is complicit in the scheme to sell his debt for more than it is presumably worth. Granted, he may be an unwitting accomplice but part of the banker's job used to be to firmly tell people that they are biting off more than they can chew.
This appears to be a populist misunderstanding of how the mortgage market operates. A significant majority of mortgage loans are packaged and resold. This allows there to be a thriving secondary market for them, and in the end, lower interest rates for borrowers, as those buying the loans bid for them. Meanwhile some companies specialize in originating loans, while others in servicing them. What has been surprising to me in this subprime loan meltdown is not that aggregating and reselling loans is occurring, but rather the vastly increased sophistication in the ability to disaggregate risk in the packaging.
12.12.2007 10:58pm
Thomas_Holsinger:
All problems can be solved by the proper generous attitude towards deserving Congressmen.
12.12.2007 11:02pm
A. Zarkov (mail):
There is plenty of blame for credit crisis to go around. I pick three fundamental enablers. First is the derivative products industry. The more one learns about derivatives, the more you will realize their primary function: to get around regulations. Don't buy that crap about making markets more efficient. I highly recommend three books: FIASCO, Infections Greed and Traders Guns and Money. These provide a good semi-technical introduction to the subject. They explain how to use derivatives to make a silk purse out of a sow's ear. Be sure to read the chapter in FIASCO "Don't Cry for Me Argentina," to see the mechanics of how Morgan Stanley turned an ugly worthless bond into something you can sell. Of course the purchaser got his face ripped off. Then we have the Ratings Agencies. A study of the Orange County Bankruptcy (provided by FIASCO) shows the problem. The County's portfolio got a top rating just before it crashed. Finally the Federal Reserve also helped engineer our current financial crisis through its inaction. Read the shameless self-promoting essay in today's WSJ by Alan Greenspan. Hey Alan why were you telling people to use ARMs a few years ago? Of course there were many other actors in this tragic drama—banks, mortgage brokers, mortgage companies, underwriters, appraisers, realtors, investment banks, Fannie and Freddie, and of course the borrowers who thought they could get "The American Dream" without paying for it.
12.12.2007 11:34pm
Daniel Chapman (mail):
is MKDP a troll or a parody?
12.13.2007 12:42am
David M. Nieporent (www):
If the possibility of occassional individual variation is a legitimate argument against regulation, society couldn't regulate anything at all.
Ding ding ding. We have a winner. That's the libertarian argument, or part of it, anyway.

One might as well argue that insurance is a bad idea.
That would be silly. The parallel argument -- and the correct one -- is that mandatory insurance is a bad idea. For some people it's a good idea; they can buy it. For some it isn't; they shouldn't be forced to.

Your mistake is in thinking that decisions have to be collective, rather than individual.
12.13.2007 7:33am
J. F. Thomas (mail):
and it's a GREAT thing. some will suffer, but those who work hard, and manage risk, exposure, and opportunity will make money and create wealth for everybody

Excuse me whit, but exactly what was the "wealth" created by the housing bubble? How is the run up in housing prices in the last five years or so anything other than a pyramid scheme--people loaning money based on the assumption that an asset will appreciate in value at ahistoric rates just because there will be some greater fool who will be willing to pay more for it in a year. Nobody has created "wealth". That is exactly why we are in the mess we are in now, because people have found they cannot roll over their mortgages into a newer one based on the fanciful presumed future value of their home. Of course they would have never been able to afford the refi in the first place but that is the lender's fault for lending money that he knew would probably never repaid.
12.13.2007 9:46am
J. F. Thomas (mail):
That would be silly. The parallel argument -- and the correct one -- is that mandatory insurance is a bad idea.

Well, if you are willing to forgo all the benefits society provides you, like clean water, fire departments, emergency medicine, sewers, knowing when it is going to rain, roads, flood control, food safety, cars that are safe to operate, at least a system (however badly working) in place to make sure your kids' toys and the consumer products you use are not toxic, then I guess you can claim that insurance should not be mandatory. Otherwise, you are a freerider and a danger to your neighbors.
12.13.2007 9:52am
Inkmiser (mail):
There are two different issues here that are being lumped together. The subprime lending crisis - which has been caused in large part by a hyperactive secondary mortgage market. The second issue, which although a subset of the subprime crisis is distinct from it - predatory lending. They are not the same thing and should be considered separately. I want to address predatory lending.

There is such a thing. The problem most people have the concept is that the consumer was there, and presumably could have still protected himself from the scam. First, until you represented a few dozen of these people, I don't think you can judge just how stupid and desperate many of these people are. I have represented many clients who are completely illiterate; and many more who financially ignorant. These people don't stand a chance of protecting their own interests and don't know anyone who can help them.

Second, I do not hear many aside from the shrill left (whose cries of dismay are often discounted) talking about the actual, malicious fraud that took place in some loans. I'm not talking mistakes and I'm not talking little fibs. I'm talking about falsifying financial information, falsifying appraisals, altering credit scores on credit reports, etc. - all done by mortgage brokers. The individual was honest (if naive and ignorant); the broker was a thief.

At times it might be tough to fairly distinguish predatory lending from just another subprime loan. And I concede that hard-core predatory lending claims are not nearly as prevalent as shoddy subprime lending. But when a true predatory lending case comes into my office, I need tools to protect my clients. I don't really want special statutory remedies, but at least level the playing field for the consumer.

Here's the rub. Because of the hyperactive secondary market, a loan's servicer is rarely the originating lender. Thus, they too can claim victim status. If you have two victims, and the real bad actors are no longer around (or are not liquid), which if the victims loses? It is not any easy question.

I'm just tired of people
12.13.2007 10:16am
Inkmiser (mail):
Oops. Forgot to finish the last sentence, although adding a period would make for a telling comment itself.

I'm just tired of people asserting that, without exception, the borrowers are the only ones to blame. I note some of the comments here apportion blame among some others, but too many others view all of these loans as purely consumer mistakes.
12.13.2007 10:21am
Aultimer:

Excuse me whit, but exactly what was the "wealth" created by the housing bubble? [...] Of course they would have never been able to afford the refi in the first place but that is the lender's fault for lending money that he knew would probably never repaid.

The lenders who made too many ill-advised loans will lose money. The lenders who didn't will make money. In the end, those lenders (and their owners) will have more wealth, and many borrowers who made profitable use of their loan proceeds will have more wealth. Does that wealth outweigh the loss of wealth of the defaulting borrowers and their lenders? The answer is clear at the moment.
12.13.2007 10:22am
Bruce Hayden (mail) (www):
I am not sure how much pity I should have for the borrower who knew that he wouldn't normally qualify, but went along anyway. But I do suspect that there were plenty of fraudulent loans where the borrower thought that he really did qualify, but wouldn't have, absent fraud by the mortgage loan initiator.

I have less for most of those on the lending side. For example, Citi is crying in its milk right now, showing big losses (which I assume are somewhat related to the secondary mortgage market). But they are big boys, really big boys.

I do have some pity for the pension plans that got snookered. Some, like CALPERS, seemed to have been doubling down, and as with poker, it sometimes works and often doesn't. But my solution there would be to make the trustees, etc. personally liable for this type of loss. Yes, they don't have the money to pay even a fraction of it. But with financial ruin hanging over their heads, they would likely be more careful with the money they are in charge of. Of course, the more egregious seem to have been public employee pensions, and it is the taxpayers who will ultimately be stuck with the bill.
12.13.2007 10:50am
craig miles (mail):
Bruce, pity for CALPERS? The calpers of the world were the demand piece of the equation. Without demand there is no subprime debacle. Citi is a clownhouse of horrors. they assumed, much like Vegas showgirls, that the appreciation party would go on forever. What nonsense, utterly lacking in risk management, the company and shareholders now pay the price. Greenspan blessed this bubble with 1% rates and nonsensical babblings at Humphrey Hawkins appearances. His legacy defense in yesterday's WSJ was pathetic. Congress wears the yoke as well. Banging the table on red lining, and selling out to credit and banking interests in 2005 drove speculation over the edge. They reduced risk to the lender, the lender lowered standards. Chickens are now coming home to roost for the ratings agencies as well. Regardless of how you slice and dice alt A and BBB paper it will never reach AAA investment grade. But that is how they rated it due in large part to diversifcation of the underlying. Good luck defending that business model in court S&P, Fitch and Moody's. Some much blame, so little time and even fewer victims.
12.13.2007 11:09am
Bruce Hayden (mail) (www):
My worry with this legislation is that it is going to be hard to draw the line between fraudulent behavior, and stupid behavior, and then keep it drawn, with an active plaintiffs' bar slavering at the thought of going after some of the big players here.

J.F. above talked about wealth creation, and then A. Zarkov suggested that the purpose of derivatives was to get around regulations. The later shows a fundamental misunderstanding about what was going on. The purpose was to slice up risk and reward. The result was that the market became more efficient, because borrowers could better match their wants and needs with mortgage products, and more money flowed into the mortgage market as a result. Also, lightly skipped over, is that initiating and servicing loans was also split out, allowing companies to specialize where there strengths were. The ultimate result was more money to lend, and thus more people able to borrow to buy homes, at a lower price, as compared to what they would have had to pay without this. Those lowered rates due to the increased efficiency in the market is what caused the wealth creation that J.F. was questioning.

To the extent that some of this was in response to skirting regulations (which I think is a minor cause), it should be acknowledged as a consequence of the rules and regulations, and not some evil plan. There are, understandably, whole industries that revolve around skirting regulations - such as all the money spent avoiding the Death (aka Estate) tax. To the extent that a huge market was able to develop here to skirt regulations, I would suggest that it is more an example of the private sector outsmarting the regulators, which is often likely given the resources on both sides, and thus says far more about the fundamental problems with regulating industries than it does about those skirting the rules being venal.
12.13.2007 11:13am
Adam J:
It always seems to me that the best regulation would be more adequate disclosure requirements by the lenders, to try and ensure mortgagers know what they are getting into and fierce punishments for fraud. I just generally don't think the government is smart enough to come up with more substantive regulations on what kind of loans are ok, and what aren't. Also, is predatory lending really that bad, any bank that attempts it will have to deal with the risk of the borrower going bankrupt, that's likely to cut into their margins.
12.13.2007 11:21am
Bruce Hayden (mail) (www):
Bruce, pity for CALPERS? The calpers of the world were the demand piece of the equation. Without demand there is no subprime debacle. Citi is a clownhouse of horrors. they assumed, much like Vegas showgirls, that the appreciation party would go on forever.
Sorry if I wasn't clear. My pity is for the taxpayers who will ultimately have to make good for the CALPERS of the world doubling down and have no pity for Citi. They are big boys there, some of the biggest.

I do feel for some of the borrowers who got in over their heads. Much of it though was really puffing by the mortgage loan initiators and real estate industry, and not anything fraudulent, and that is why attempts to regulate this are most likely to result in less credit for those who need it the most.

I do think that mortgage loan initiators who lied to borrowers and/or lenders should pay the price. But in most cases, that is already fraud, and the laws on the books should work just fine handling that.
12.13.2007 11:24am
J. F. Thomas (mail):
The ultimate result was more money to lend, and thus more people able to borrow to buy homes, at a lower price, as compared to what they would have had to pay without this. Those lowered rates due to the increased efficiency in the market is what caused the wealth creation that J.F. was questioning.

But the "wealth" was completely illusory. Housing prices, except for high growth markets where there was a good supply-demand reason, have historically tracked just above the rate of inflation, which is completely rational and sensible (and from a free market point of view desirable and predictable). The only reason housing started going up 20% a year was because of the invention of these instruments that flooded the markets with money. The availability of money caused the inflation in house prices. It was if the mortgage market was printing money a la 1920's Weimar Germany. Of course when you print money with nothing to back it (other than being secured by the fact that I say this piece of property is worth 20% more than it was last year), it will eventually implode.

Of course it is one thing to create illusory wealth when you are talking about dot.com's with no business plan other than "start a website and make money", it is quite another when you are messing with where people live, the latter has devastating consequences for people who wanted no part of the game. People who worked hard and did all the right things will still be hurt by the greed of others because not everyone has the luxury of choosing when to move or sell their house. A lot of people will not be able to ride out the storm because they will have to sell their house in a falling market because of job relocation, divorce or other life event they have no control over. Those are the real victims in all this.
12.13.2007 11:28am
Bruce Hayden (mail) (www):
Adam,

I assume that you really mean "mortgagors" and not "mortgagers", i.e. the initial borrowers. It isn't really bankruptcy that is the issue, but rather foreclosures. Yes, bankruptcies may result from deficiency judgments, but some, if not many, of those foreclosed upon should be able to skirt bankruptcy.

And, of course, I agree with you about regulation, but that is why I am libertarian and not more socialist minded.
12.13.2007 11:30am
J. F. Thomas (mail):
And, of course, I agree with you about regulation, but that is why I am libertarian and not more socialist minded.

But wouldn't bankruptcy be an impossibility in the perfect libertarian world? Don't want the government protecting deadbeats from their debtors.
12.13.2007 11:35am
Bruce Hayden (mail) (www):
JF

The fact that housing prices have traditionally tracked just above inflation is really almost irrelevant. Part of the added increase in prices here is because of the more efficient market for financing, and thus wealth creation.

Yes, there was, and somewhat still is, a housing bubble. But my prediction when it is all over is that housing prices will still be notably above where they would have been using the traditional metric you suggest. In other words, when the bubble bursts, and the market corrects, it appears that they are correcting to a value higher than would be predicted using your suggested price increases.

Of course, we shall see how this ultimately shakes out, after the market corrects around the country. But, as usual, the regulators are ready to jump in long before the evidence is in.
12.13.2007 11:43am
ReaderY:
Markets may be good at pricing risks in the long run under long-run perfect information.

The problem is that unlike modeling assumptions and simulation environments, human beings are neither omniscient nor immortal, so markets tend to be considerably less effective when human beings get involved than tends to show up in the computer models and simulations.
12.13.2007 12:31pm
A. Zarkov (mail):
Bruce Hayden:

You confuse market liquidity, depth and efficiency. In practice, derivatives are used to decrease market efficiency in the informational sense. In an efficient market, prices reflect all the available information about a security up to inconsistencies smaller than applicable transaction costs. Now look at the example of Argentina's BECON Pre4s bond offering. No one in his right mind would buy such a thing, and that's why the Argentina Central Bank went to Morgan Stanley's Derivative Products Group to make this sow's ear into a silk purse. Of course MS made the market more liquid for BECONs, but at the cost creating so much opaqueness, investors overpaid for it. They overpaid because they didn't have the technology to determine the appropriate price given the true level of risk. Moreover, MS recalled the Prospectus for before investors could see it to get rid of the forbidden word "derivative."

Precisely the same thing happened to the mortgage market. Of course CDOs increased the amount of money available to finance mortgages. But they did that at the cost of disguising the true risk. Inventors thought the senior trances were essentially risk free, but as we now know they weren't.
12.13.2007 12:36pm
Cornellian (mail):
Per Warren Buffett, don't buy any business you don't understand.
12.13.2007 12:36pm
ReaderY:
What I'm arguing here is that the argument against government regulation of mortgages is only as good as the entire libertarian argument - one has to accept a rather strong form of libertarianism, including among other things no FDA, to accept it. But arguments are equivalent to their contrapositive. Accordingly, one reframe this argument into its contrapositive equivalent -- if one isn't willing to accept an extremely strong form of libertarianism, strong enough to abolish the FDA, one shouldn't accept this argument against government regulation of mortages either.

I originally joined this site because of discussion of the Commerce Clause and other issues that occurred a few years back. But in all candor this site has convinced me not to be a libertarian. Libertarianism asserts some very strong assumptions, including an assumption that effects are additive and interaction effects are negligible -- the whole can be regarded as the sum of parts, so one only has to pay attention to the parts to get the picture. This has never struck me as a particularly plausible assumption; it's been increasingly rejected in most scientific fields; it seems odd that economists would continue to believe it. The fact that it regularly gets asserted with emotional affect, in the manner of religious beliefs, contributes to my skepticism (although it's not decisive, since beliefs I agree with can also be asserted this way).

Here the insistence on focusing on the individual as the only reality while completely ignoring the possibility of aggregate consequences strikes as essentially ignoring important aspects of reality in favor of those aspects one prefers to focus on. I can understand blind people calling failing to regard sight as a source of information about the world and describing their data solely in terms of hearing etc. But I can't understand sighted people who simply ignore visual information, acting as if it doesn't exist.

Anyone who's studied a little bit of traffic engineering or the math behind it knows that leaving traffic solely to individual decisions is a guaranteed recipe for gridlock, that individual decisions will interact in net negative ways and that systemic intervention - regulation - is required to achieve order. I see no reason to avoid these concepts in other areas where individual decisions interact to create social consequences which are not simply the sum of those individual decisions.
12.13.2007 12:51pm
r78:
This post is premised on the assumption that eliminating racially discriminatory redlining necessary leads to predatory lending, which is just a bit like arguing: They blacks agitated to be able to sit at the diner counter and then have the gall to complain when we serve them rancid soup.

Two different things.
12.13.2007 12:54pm
A. Zarkov (mail):
J.F. Thomas:

"Excuse me whit, but exactly what was the "wealth" created by the housing bubble?"

I think you need to tell us your definition of "wealth." Now I completely agree that the housing bubble was essentially a Ponzi scheme. Housing prices were and still are out of line with real estate fundamentals. Perhaps by "wealth" you mean income-generating capital. Using this definition we see that houses are way overpriced because they rent for much less than the cost of owning. However houses are also consumption good. Do you think that consumption items should not be counted in the tally of wealth?

BTW isn't the Social Security System essentially a Ponzi scheme? The original 1937 cohort got a free ride in that they were able to draw benefits without having had to make contributions? Ponzi schemes blow up when you run out of new entrants to prop up the system. Isn't this what's happening to SS? Now I'm not saying that we shouldn't have SS. I'm saying that we should recognize it for what it is: an income transference between generations.
12.13.2007 1:00pm
ReaderY:
My constitutional approach remains the same -- the view of ancient Skepticism, that we don't really know for sure what philosophy results in the best kind of society, and hence people have to work things out as best they can based on very imperfect information and wide variability of belief. Hence I've supported the Holmesian view that it was not the intention of our constitution to impose a single consistent political or economic philosophy on society, only to ensure a functional decision-making process and prevent outcomes perceived as extreme. I believe that except for a very limited number of situations, the constitution is generally neutral about whether decisions should be made individually or collectively. This is something people have to work out as best they can based on the information they have available. On many things, we'll likely never know for sure which approach is best. People are entitled to act with emotional certainty, but in all candor I regard libertarians' claims that government regulation is bad in about the same way I regard claims that homosexuality is always bad. Such beliefs may be right, and may be wrong. I would support people's right to convince each other that they should be the basis of policy if they want. I believe judges would be mistaken to impose their own contrary views and take such matters out of the scope of democratic decision-making. But I don't necessarily agree with such views myself.

I tend to assess matters like the takings clause based on language etc., not based on an assumption that the constitution embodies and implements any single over-arching philosopy. I don't think it does, and certainly not one I would necessarily agree with myself.
12.13.2007 1:03pm
Thomas_Holsinger:
Daniel Chapman,

A sense of humor is like a capital gain - if you don't know what it is, you don't have one.
12.13.2007 1:47pm
Adam J:
A. Zarkov - Pardon my ignorance, but exactly how is your bond example relate to derivatives? Last I checked a bond is not a derivative financial instrument at all.
12.13.2007 2:41pm
SG:
AdamJ:

I don't know about what A. Zarkov is referring to, but bonds can definitely be derivatives. Think zero-coupon bonds.
12.13.2007 3:11pm
A. Zarkov (mail):
Adam J.

A bond can be a derivative. A bond is a set of cash flows. The cash flows can be derived from some index. For example I could have a bond that has coupon payments that are 15-LIBOR (zero if LIBOR > 15), where LIBOR is the London Interbank Offered Rate. Such a bond would be a bet against a rise in interest rates. Many derivative bonds are so complicated on the most mathematically sophisticated can price them.
12.13.2007 3:30pm
Adam J:
So was the problem with the Argentinian bond determining exactly what the present value of the bond because it's interest payments were derived from some crazy calculation, or was the problem that investors couldn't determine the present value because they didn't realize the risk of Argentinia defaulting? Or both?
12.13.2007 5:45pm
gasman (mail):
Predatory lending? The who problems seems like one of predatory borrowing. Borrowers unfortunately include many who do not see a deal with a bank as a solemn promise to pay. They see it as a thing that they might make some payments on, if everything goes they way they hope; and their personal commitment to the contract is nill, as their fallback plan is to walk away from the property and the loan.
Now a lot of institutions thought that they could get filthy rich lending to this crowd, and for a time they did. The trough of money was too tempting and the rest of the market came to feed. An increasing supply of money was chasing houses, home prices rose faster, everyone seemed to be making money on real estate hand over fist and like the stock market of 2000/2001, no one wanted to be the first off the ride because there was still a little more money to be made before it all went kablooey.
Who's at falt? all participants are responsible for their own choices. Lenders goofed and should suffer, borowers goofed and should suffer. No one really predated on anyone else, no one really forced bad choices on anyone else.
So let's let the chips fall, housing prices tumble, and people with responsible financial beliefs and 20% down acquire some of the newly affordable housing.
12.13.2007 7:05pm
A. Zarkov (mail):
Adam J.

The problem was determining the bond value and the true level of risk. It took Morgan Stanley's quants and a lot of computer time to come up with the proper risk adjusted value for the bond. Lacking this information, the investors did not realize how big a fee Morgan Stanley was getting. The repackaging also allowed certain kinds of investors like pension funds to buy the bonds that regulations would normally prohibit. This is all in the book FIASCO.
12.13.2007 8:05pm
David M. Nieporent (www):
Second, I do not hear many aside from the shrill left (whose cries of dismay are often discounted) talking about the actual, malicious fraud that took place in some loans. I'm not talking mistakes and I'm not talking little fibs. I'm talking about falsifying financial information, falsifying appraisals, altering credit scores on credit reports, etc. - all done by mortgage brokers. The individual was honest (if naive and ignorant); the broker was a thief.
Remind me whose signature was at the bottom of the loan application that listed the borrower's assets and income?
12.13.2007 8:17pm
ReaderY:
I've personally been instructed to overstate my assets in order to get a mortgage and told that this is required. I got the mortgage anyway. Many people I know received similar instructions.

Mr. Nieporent, do you honestly believe that it is legitimate for companies who train their staff to tell customers that this is what the mortgage company requires of them to claim that their customers who did what they werer told have thereby defrauded their instructors? The particular fraud involved is a rather convenient one to have perpretrated on one, is it not?
12.13.2007 8:56pm
NickM (mail) (www):
gasman - far worse than the people who planned to walk away if it didn't work out are the people who plan to stay there and expect the payments to be adjusted to their liking.

WRT the illiterate and innumerate people Inkmiser referred to, those people will be victimized by one scam or another, and no set of laws (other than imposing conservatorships) will be sufficient to protect them. Unfortunately, the effort to do so often treats the rest of us as being incompetent to manage our own lives.

[Apropos of very little, but I recently heard a story from a friend that shows just how innumerate some people are. He's a municipal prosecutor, and handled a drunk driving case last month that went to trial. The jury hung 11-1 when one juror refused to go back into the jury room and deliberate because other jurors were calling her names. He and the defense attorney questioned jurors afterward, and found out that they were calling her an idiot, moron, retard, etc., because she was insisting that the man wasn't legally drunk for the reason that 11 is less than 80. In her mind, .08 meant 80 and .11 meant 11, and no one on the jury could convince her otherwise.]

Nick
12.13.2007 9:20pm
Jon Rowe (mail) (www):

First, until you represented a few dozen of these people, I don't think you can judge just how stupid and desperate many of these people are. I have represented many clients who are completely illiterate; and many more who financially ignorant. These people don't stand a chance of protecting their own interests and don't know anyone who can help them.


I know one of these folks real well. I am the opposite of this. And I constantly give him the "right" advice. But he insists on shooting himself in the foot. Should the law step in and rewrite the rules just because folks like this exist?
12.13.2007 9:35pm
A. Zarkov (mail):
A fool and his money are soon parted.
12.14.2007 12:02am
David M. Nieporent (www):
Mr. Nieporent, do you honestly believe that it is legitimate for companies who train their staff to tell customers that this is what the mortgage company requires of them to claim that their customers who did what they werer told have thereby defrauded their instructors?
I believe that if a company trains its staff to tell customers to do this, the company is guilty of fraud. But I believe the part -- right where you sign -- where it says that it's a federal crime to lie on the application ought to clue you in not to do that, regardless of what they "tell" you.
12.14.2007 4:14am
snelson (mail):
"part of the banker's job used to be to firmly tell people that they are biting off more than they can chew."

That was before the banker who told a member of a Federal Protected Class this could be hauled into court and bankrupted as a racist bigot. Of course, once you can't enforce standards on everyone, you can't enforce them on anyone.
12.14.2007 11:10am
Thomas_Holsinger:
David M. Nieporent,

Perjury is not fraud. Fraud requires an intent to induce reliance on the misrepresentation. Perjury does not require an intent that anyone rely on the perjured statement.
12.14.2007 4:19pm
Mary Katherine Day-Petrano (mail):
"and it's a GREAT thing. some will suffer, but those who work hard, and manage risk, exposure, and opportunity will make money and create wealth for everybody"

Unfortunately, THIS appears to be a classic example hopeful wishful, but NOT realistic, thinking. The housing bust is predicated on more and more recent abrupt climate change due to global warming reports admitting the G/W crisis is real, NOT a particular "hard working" person's risk management savvy or investment acumen.

Why just today the news reported the Walrus stampedes where baby walruses have been crushed by 40,000 + herds congregating in the coastal areas (Russian side) of the Bering Straits, caused by the Artic ice melting and destroying their habitat. California scientists likewise just came out with a new prediction that all Artic ice (apparently that includes all of the Greenland ice sheet) will be completely melted by 2012-13.

We have additionally heard the housing bust is not expected to be remotely close to over until at least late 2009 or later -- HOWEVER, netting things out, the anticipated-wishful housing "recovery" has the highest order of probability of meeting the inescapable 21 foot sea level rise, devastating wide swaths of coastal property in numerous states -- LOOK OUT, Florida!! Miami underwater...all of Wellingon sunk...no more Florida keys leading to Key West...open seas all the way to Okeechobee ...

I'm just sayin'

And, when the net tally of depreciating to worthless status coastal properties inevitably lost to G/W sea level rise overtakes any anticipated housing bust "recovery," well...I don't want to be the bearer of the grim details of all that bad news. Bubble, bubble .., bubbles. .. Gurgle-gurgle

"How is the run up in housing prices in the last five years or so anything other than a pyramid scheme--people loaning money based on the assumption that an asset will appreciate in value at ahistoric rates just because there will be some greater fool who will be willing to pay more for it in a year"

Not only a pyramid scheme, but the biggest fallacy of all -- that all real property is "appreciating," when it is becoming abundantly clear the soon-to-go-under-sea-level-rise properties are DEPRECIATING to worse that a worthless value -- just wait until the underwater properties leach toxics and become maritime superfund cleanup sites!! So much new work for lawyers!

Not so for the poor property stuck owners who will be on the hook to pay for the superfund cleanups, Congress will change the Bankruptcy Code to make such cleanup costs as well as mortgage deficiency judgments non-dischargeable, and the woes-is-me whining of the migrating refugee has-been property owners and defunct mortgage lenders will reach a roar.

"opportunity will make money" ----> Perhaps so, but it will likely be from bait fishing shops, newstands, and boat rentals along the submerged I-4, I-75, and I-95 coral reef corridors.

And for all those gators marching out of the Everglades of Central Florida anyone?

Sheer bliss.
12.15.2007 1:11am