My new article, "The Law and Economics of Subprime Lending" is available for download on SSRN. If the past few months are any indication, I'll have to post an updated version of the article next week (and the week after...). Thanks also to VC Commenters who pointed me to some very useful sources when I posted on the foreclosure issue a few weeks back.
Here's the Abstract:
Abstract:
The collapse of the subprime mortgage market has led to calls for greater regulation to protect homeowners from unwittingly trapping themselves in high-cost loans that lead to foreclosure, bankruptcy, or other financial problems. Weighed against this catastrophe are the benefits that have accrued to millions of American families who have been able to become homeowners who otherwise would not have access to mortgage credit. Although the bust of the subprime mortgage market has resulted in high levels of foreclosures and even problems on Wall Street, the boom generated unprecedented levels of homeownership, especially among young, low-income, and minority borrowers, putting them on a road to economic comfort and stability. Sensible regulation of subprime lending should seek to curb abusive practices while preserving these benefits.
This article reviews the theories and evidence regarding the causes of the turmoil in the subprime market. It then turns to the question of the rising foreclosures in that market in order to understand the causes of rising foreclosures. In particular, we examine the competing models of home foreclosures that have been developed in the economics literature - the "distress" model and the "option" model. Establishing a correct model of the causes of foreclosure in the subprime market is necessary for sensible and effective policy responses to the problem. Finally, we review some of the policy initiatives that have been suggested in response to the crisis in the subprime market. Because new regulatory interventions will have costs as well as benefits, until the causes of the market‘s problems are better understood it may be that the best policy in the short-term is to do little until well-tailored regulatory approaches are available.
The world is finally catching on to the fact that the dollar is now worth less than they thought it was. This has little to do with the default rate in sub-primes.
Good economic laws do the same thing as good criminal laws, make people feel safe.
Kevin
Interestingly, the 'Z' appears first (though I suppose that spares us the pain of titling it "Subprime Mortgages From A to Z").
I understand that a lot of the financial liabilities were transferred or hidden by mortgage brokers and underwriters, but I don't see how any of these companies will make the mistake again. What did CitiGroup lose? Like 18 billion? They won't do it again, and I don't see that anyone who got stung by something like this will - including those who are borrowing what they cannot afford to pay back, be it a homebuyer or a lender.
I recommend resorting to the laws of equity, even if the law would provide the result you suggest is likely, equity would abhor it and impose a constructive trust in your client to avoid the unjust enrichment of the lessors.
If you look at Truth in Lending, it becomes pretty clear that Congress specifically wanted such unjust enrichment.
Nice theory. Too bad it doesn't jive with reality. Home ownership rates have now returned to the level of 2001 and the end of the slide is nowhere near. This PONZI scheme of Mortgage Backed securities where millions of people were duped into believing residential real estate could sustain year to year increases at 15% or more above the rate of inflation (instead of the historic trend of pretty much rising at the same or slightly above) has irreparably damaged the economy.
People like you would have us believe, contrary to common sense and empirical evidence, that this is somehow a good thing.
I don't think that the sub-prime fiasco is being described by anyone as a good thing, only that steps that might have been taken to avoid it would have been a worse thing.
Oh really? You don't remember the S&L debacle of the '80s. Or the dot.com bubble of the late '90s?
They'll do it again. As long as CEO's and traders can make ungodly sums convincing some sucker to by something on credit and thinks they are smart enough to not get caught holding the bag, it will happen again.
Todd's thesis is that this debacle at least increased the level of homeownership. That thesis is demonstrably untrue. Therefore, his paper begins with a false premise and any conclusions he draws from it must be complete and utter bullshit. In fact, people are worse off now than they were when they started.
Hat tip: Steven Hayward at No Left Turns
And this has to be the understatement of the month, if not the year.
The comparison of homeownership rates since 2001 is only pertinent if that is the time period in question.
Is it a "pro-bono" attorney on the other side of case for free?
No that's not what has done. The WSJ had an article on the mathematical model behind CDOs. mathematician Li used an actuarial approach where one default could trigger another.
He talks about one situation with less than ideal results, and from that one instance makes enormous global generalization.
I am sorry, but that is definitely arrogant thinking. Its nice that your a know it all. You know that there there does not exist a single policy that could help more than hurt.
Okay... I think that is the typical view of libertarians. That you can arrogantly make huge generalized statements like that from extremely limited evidence. Which is why I am convinced they are all idiots.
Nuance is more intelligent.
I'm trying not to get too into the details, but TIL applies because it was done through a broker that arranges this sort of agreements. There's still an off chance that this agreement doesn't meet the requirements of truth and lending, depending on how much the lessor paid the intermediary, but right now there seems to be a good chance that it will.
I mentioned a anecdote demonstrating one of the problems with regulating the mortgage industry, that doesn't mean that it is my entire basis for opposing such regulation. I oppose regulation in this area because any such regulation is going to prevent people from deciding for themselves whether a either lending money, or borrowing money under particular circumstances is a good idea in their particular situation.
Pretty much any regulation that would have "fixed" this problem would have probably acted to limit poor people's ability to get loans, either by straight out prohibiting people in certain conditions from getting a loan, or by limiting the terms under which such a loan can be made to terms under which no rational bank would lend to such a person.
This is a bad thing. This means that it becomes that much more difficult for poor people to buy homes, or to borrow against their homes' value. Owning your own home is often a good thing, as it allows you to turn a portion of your housing costs into equity which may be drawn on later, rather than just having it disappear into your landlord's pocket. Being able to borrow against your homes' value is a good thing because it helps people raise money in case of emergency or, as many people do, to attempt to start your own business. Preventing people from taking out such loans will leave poor people frittering their money away on rent, unable to raise money for emergencies and unable to raise capital to start businesses to get out of poverty.
Now there are some dumb people who took out loans that they couldn't afford, and there are those dumb lenders who made loans to people who can't afford them, but them's the breaks. Do you really want to protect dumb people at the expense of letting people who can actually understand their financial situation make those choices that are actually in their best interest? I certainly don't and I certainly don't think that it would be good for the economy in the long run.