Sunday, August 26, 2007

Subprime--I was probably wrong

I long have taken a caveat emptor view about mortgage lending. I assumed borrowers understood that loan brokers where in sales, and they would therefore try to get as much money out of borrowers as possible. Just as one should be wary with a car salesman, so too should he be wary of a mortgage saleman.

The problem is that borrowers did not understand what the sales people where selling them. Loans are complicated--even the "sticker price," the APR, doesn't really tell the story. And so borrowers, particularly those without any financial training, are at a disticnt disadvantage when dealing with lenders.

I am not sure what to do about this. I have long thought that the sub-prime market could give borrowers access to cheaper credit than they would get elsewhere; nevertheless, the market also led people to make what were clearly bad decisions. I am not sure how reasonable it was to expect borrowers to understand how bad their decisions would turn out to be.

And so we must figure out a mechanism for helping borrowers navigate the mortgage waters better. I am not sure what that is. One possibility: tie loan broker compensation not just to loan origination, but loan performance. They don't get fully paid until the loan is fully paid. This would reduce the incentive for them to make loans that will turn into defaults.


Anonymous said...

The trouble is when a consumer winds up with a "mortgage salesperson" instead of a "mortgage professional". It's the difference of working with someone who is transactional (they view the borrower as a transaction they'll have one time) instead of someone who has a long commitment to the borrower.

I'm hoping with this current landscape of the mortgage industry that the "sales people" will bail out and go back to selling what ever it was they did before they landed in mortgage.

Washington (state) just began licensing of LOs this year. Out of the 15,000 loan origninators who have registered as working for a mortgage brokers (those who work for banks do not have to be licensed); only 700 have taken the exam which is required by the end of the year. I think (hope) this figure is telling that there will be less LOs. Hopefully only the strong, ethical one's survie.

Anonymous said...

why would subprime offer cheaper credit then other
sources? Assuming risk-adjusted returns are neutral
it's the same as prime lending.

My take is the SubPrime market is populated by
the same people who rent furniture and appliances.

The Federal government has numerous programs
to help beginers out, HUD, FHA, VA, FHMA,
the subprime industry was taking advantage of
suckers who didn't understand that there were
reasonable federal programs already.

what's sad is the banks hired their flacks and
lobbyists and pet academics at CATO and
Heritage to sell this song.

I credit the author here with having the honesty to admit he was wrong

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