I have spent the past two days participating in a conference at Harvard Business School on Consumer Credit (so it became a conference about subprime). Some impressions:
(1) When it comes to mortgages, very few of us are really informed about what we are doing. Of the people in the audience who had an adjustable rate mortgage, no one could say what their payment would be if it rose to the fully indexed amount next year. And the audience was filled with law professors and economists who teach at places like, um, Harvard. This has pretty profound implications about the meaning of consumer choice in the mortgage market.
(2) John Campbell noted that competitive pressures lead lenders to offer products that rely on somebody being stupid (the stupid subsidize the savvy). The 2-28 ARM may be just such a product. While I couldn't imagine myself saying this a year ago, it may be welfare improving to reduce mortgage choice. A menu that contains 30-year fixed mortgages, and fully indexed one, three and five year ARMS may be enough (although I reserve the right to change my mind on this).
(3) Amy Cutts showed (I think) that when lenders can foreclose more rapidly, there is a greater tendency for both cures and mortgages.
(4) Everyone involved in the mortgage process needs to have some capital at stake--including borrowers (i.e., no down payment mortgages just don't make sense).
(5) The housing market may be getting bad enough that some sort of bail-out might not create serious moral hazard problems--that is, many people who did nothing wring are now at risk, and for the sake of the macroeconomy, we need to think about how to help them.
(5) They regulate the mortgage chain far more in the UK and the Continent than in the US. Good news: defaults are much rarer. Bad news, consumers have much less mortgage choice. Borrowers in the UK can't get fixed-rate mortgages; borrowers in Germany can't prepay their loans.
(6) I love visiting Cambridge (I know, HBS is in Alston, but close enough).
Good comments Richard. Remember though, it wasn't just lenders driving this: I counted 26 books on my bookshelf on buying, fixing, flipping your way to quick wealth(I loved to read the books- it seemed so easy!only fixed up my own home though).
ReplyDeleteHere's my theory: Americans have been poor savers for retirement for a long time(Official savings rate in the US: <0%!!!)Remember the fable of the ant and the grasshoper? We are definitely a nation of grasshopers.The bull market in the 90's seemed like the perfect way to play nest egg catch up. When the tech crash came, and people lost serious amounts of cash, they consoled themselves that at least their home had held its value.In fact, home prices were rising. Then they realized: hey! real estate just might help them make some of that lost money back. Heck, they didn't even need to worry about saving, they could count on their rising home value to act as a personal piggy bank. Just refinance and presto, you could buy a new car, pay off your 8 credit cards and take a great vacation! Perhaps what started all of this was cash out refi's and then as property values continued to soar, ARM's became the only way for anyone in Cali to even be able to buy. Then people got greedy: Buy a second house, and then a third(in Vegas, or Phoenix) and keep refinancing each of these and build an EMPIRE!! Just like the books/RE investment
clubs/websites/blogs were telling them to do. Soon these home equity warriors were searching all over the US for homes to buy, with no money down, interest only mortgages.
As a realtor, I've met many, many flippers, both realtors and lay folks who would say that they were "real estate investors". They would always brag about how much they made, how quickly they made it, and with little or no money down!
Everyone was in on this mortgage bonanza. All it has shown me is that human nature never changes: greed motivates, then fear paralyzes, and everyone's memory sucks.
Other realtors: These ideas are mine, and also are on my website, so please folks, don't steal my material!!!(I do help others write stuff for their own blogs-just email me at alexandra1662003 on yahoo
One more thing: no one ever knows enough about what we invest/participate in: we didn't know what the tech companies we were investing in did, we didn't understand our mortgage terms, and the investment pros who bundled and sold our mortgages as CDO's didn't really understand the underlying risks either. Was it Buffett, quoting Graham and Dodd perhaps, who said that we should only invest in that which we can understand and explain in one sentence?
ReplyDeleteI agree that our choices need to be simplified, and that the terms of our narrowed field of mortgage selections need to be easily understandable. There should be rules about who has access to the exotic/toxic mortgages akin to the definition of "sophisticated investor" that you see in the stock market prospectus's.
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