Should We Reward The Irresponsible?
June 27th, 2008
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Tiffany Taylor says with regard to the proposed FHA reform measure now being considered on Capitol Hill that “I just don’t see the logic in rewarding irresponsible people that bought more house than they could afford, or spend more than they make.”
I suspect a lot of people agree with Tiffany and I am both sympathetic to her view and yet in disagreement.
If the current mortgage meltdown could be resolved by somehow punishing only lenders who made dumb and only borrowers who knowingly borrowed more than they should or lied on loan applications, then I would say great.
But that’s not possible. The dull reality is that we are all interconnected with toxic loans, including those who own homes free and clear and have no mortgage debt.
If Tiffany’s neighbor is foreclosed the value of Tiffany’s home will go down. That’s the way the world works, thus it makes sense to see if we can help the neighbor if only to help Tiffany.
As well, many of the people who are losing their homes did not borrow more than they should and did not lie on their loans. Instead they have run into tough times as the economy has failed to produce jobs, companies are laying off workers and wages have stagnated while costs have risen.
In the case of every loan, without exception, lenders had the right to decline the loan application. They had the right while underwriting the loan to ask for as much information as was necessary to make a prudent financing decision. And they surely had the right not offer loan products which ignored the most basic lending standards such as verifying a borrower’s income or getting an actual appraisal for each property financed.
The federal government, which regulates national lenders, allowed toxic loans to be made even though it had the clear regulatory authority to stop exploding ARMs, option ARMs, interest-only financing and stated-income loan applications. As Alan Blinder, a former vice chairman of the Federal Reserve, wrote recently in the New York Times:
“As long as the central bank is also a bank supervisor and a regulator, it is extraordinarily well placed to observe and understand bank lending practices — much better positioned than almost anyone else. Beyond merely knowing more, part of a bank supervisor’s job is to make sure that banks don’t engage in unsafe and unsound lending, and to scowl at or discipline them if they do. We know that America’s bank regulators fell down on the job as the housing-mortgage bubble inflated. But that was a failure of bank supervision, not of monetary policy.
“AND what about instruments specifically aimed at the bubble? Whereas the Fed’s kit bag is pretty much empty when it comes to stock-market prices, it is stuffed full when it comes to taking aim at bank lending practices. Escalating upward from a sternly arched eyebrow to an outright prohibition of certain types of lending — for example, subprime loans with no documentation for 100 percent of a home’s appraised value — bank supervisors have a broad range of finely calibrated weapons at their disposal. Like the Mikado, they can ‘let the punishment fit the crime.’” (See: Two Bubbles, Two Paths, June 15, 2008)
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