Monday, August 13, 2007

Democrats and subprime mortgages

The word from the democrats on subprime mortgages is an all too familiar one: We need more regulation, its not your fault, someone else is always to blame.

I would be upset if my bank gave me a higher interest rate than I deserved. You protect yourself by shopping around. Does that lead me to foreclosure? Of course not, it just means I'm buying less house and paying more interest. Foreclosures are up because of one thing: homebuyers can no longer afford their payments. This is a combination of poor loan terms, inflated appraisals, and lots of easy credit. However all of this comes down to the person signing up. Your payment is right there on the document. Is it an adjustable rate? Then why are you signing up for a monthly payment you can barely afford knowing it will increase in 2, 3, or 5 years?

There are many people taking (and who do bear) the blame: brokers, lenders, Wall Street. See anyone missing from that list?

Instead, they call for more regulation. Isn't a bank supposed to make money? Shouldn't they be charging what the market will bear and what customers will pay? Why should the government regulate how their commissions work? Doesn't competition between banks already regulate that?

Some other things they would like to get rid of.

Prepayment penalties: I didn't sign up for one, but I know people who did. Isn't this an incorporation into the expected profits of the lender? If I don't plan on moving for 5 years, and they will lower my rate or origination fees if I accept a prepayment penalty clause, isn't that good for me the consumer? If I suddenly want to move after 3 years, why shouldn't I fulfill those obligations that I agreed to? If I don't want a prepayment penalty, I can just refuse it. If one bank won't agree, another will.

Tighter underwriting standards: Judging a persons ability to repay the loan is a risk factor for the bank. If they are willing to take the risk, I say let them. When they cry to the Feds that they are going bankrupt, tell them to pound sand. Taking on a mortgage you can't afford is a risk for the consumer. If you take a loan with a payment based on a teaser rate that you can barely afford, and you can't afford the new payment with the teaser rate goes away, you gambled and lost.

Require escrows: I have an escrow account. But why force lenders to use them? Consumers would be better off saving on their own, accumulating interest and paying taxes/interest themselves.

Eliminate no-doc loans: If a consumer wants to state their income, and a banker is willing to take that risk, why is this a concern? If the customer lies on the loan, prosecute them.

None of these solves the underlying problem - people buying more house than they can afford. Maybe instead of more regulation we should be promoting more consumer education?

1 comment:

Jim said...

Well according to some people the government is the problem, not the solution. Regulation can do some stuff to prevent banks from charging whatever they want, but we have so much fine print now with everything that is signed, who actually reads everything? Look at the fine print on a credit card offer. Some people are very naive and just look at what they're getting and what the payments will be, sign away.

I don't think people should be required to go through credit counseling before trying to get a mortgage either. There was a local house bill in the state of Illinois that would have required just this if passed. Is this probably a good thing for some people who shouldn't be buying a house? It should not be rocket science to think someone making 50-60k can afford a 400-500k house on 100% financing.

One positive thing about regulation is I feel that things need to be openly disclosed. It should be disclosed in a way that it almost spells out rip off if things look very bad. Some people shouldn't be buying houses and a foreclosure is the result of not being able to afford a house. Someone having sub prime credit should be a red flag to not own a home because there might be a problem?

I don't look to the government for the solutions or answer to the problem. If we waited for the government to fix everything for us, to make it more how we would like it to be, do we really have control of anything or has it controlled us? I feel government should be relatively invisible and not try to keep so many people dependent on it for the solutions.