05 July 2010

"What Do Mortgage Lenders Want?"

EconLog :: Arnold Kling :: What Do Mortgage Lenders Want?

Mike Konczal writes,
I think further deregulation would see something similar to what we see in the credit card market, where everyone's mortgage looks like whatever the laws of North Dakota say, and that the poorest homeowners (or "inept", if you prefer) cross-subsidize the richest. Like subprime, the whole thing would be characterized by interest rate jumps and penalties and a whole bad-faith expectation that someone can actually pay it off.
What this implies is that in the absence of regulation, lenders would prefer to issue mortgages that cannot be paid off. I disagree that the main goal of mortgage lenders is to create foreclosures. Lenders lose money on foreclosures, and the more foreclosures a lender has, the less likely it is that the lender will remain in business. [...]

What people cannot seem to get their minds around about the subprime crisis is that the biggest losers were the big companies that took the credit risk on the loans, not the borrowers. I think that this reflects our deeply-ingrained folk Marxism, which divides the world into villain and victim classes. Our folk Marxism leads us to view low-income and minority home buyers as a victim class and to view corporations as a villain class. What's wrong with that picture is that the villain class wound up incurring the majority of the losses (I was going to say that the villain class wound up taking the losses, but that would be overlooking the fact that taxpayers wound up holding the bag.)
First of all, poor credit card holders do not subsidize rich credit card holders. Issuing a credit card to a "rich" card holder* is a profitable activity already. The subsidy actually flows from some "poor" card holders to other "poor" card holders, the same way the subsidy for checking accounts and ATM cards flows. Specifically, banks use the profits generated by irresponsible customers to cover for the losses or slim profits on responsible but low volume (again, "poor") customers. I fail to see this as any more sinister than the way I can get slightly cheaper cold cuts at the grocery because they are subsidized by the profits from the people that buy the over priced pre-prepared sandwiches from the deli counter.

(* Where "rich" means "someone who puts a high volume of transactions on their card" not "someone who has a large stock of wealth.)

Second of all, where do people get the idea that bankers want to issue loans that don't get paid back? That's a not even wrong idea. Any body who has ever lent an unreliable acquantance even a dollar to buy a coke should know that it's a losing strategy to give loans to people you don't think are going to repay them

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