And in general looser credit is better than tighter credit, within limits that were obviously breached, but looser is the more liberal impulse.
Doug Henwood wrote:
> [Thanks to S.T. for pointing this out. At the elite level, there is no
> penalty for failure in this society.]
>
> New York Times - March 29, 2007
> <http://www.nytimes.com/2007/03/29/business/29scene.html>
>
> ECONOMIC SCENE
> ‘Irresponsible’ Mortgages Have Opened Doors to Many of the Excluded
> By AUSTAN GOOLSBEE
>
> “We are sitting on a time bomb,” the mortgage analyst said — a huge
> increase in unconventional home loans like balloon mortgages taken out
> by consumers who cannot qualify for regular mortgages. The high
> payments, he continued, “are just beginning to come due and a lot of
> people who were betting interest rates would come down by now risk
> losing their homes because they can’t pay the debt.”
>
> He would have given great testimony at the current Senate hearings on
> subprime mortgage lending. The only problem is, he said it in 1981 —
> when soon after several of the alternative mortgage products like those
> with adjustable rates and balloons first became popular.
>
> When Senator Christopher J. Dodd, Democrat of Connecticut, gave his
> opening statement last week at the hearings lambasting the rise of
> “risky exotic and subprime mortgages,” he was actually tapping into a
> very old vein of suspicion against innovations in the mortgage market.
>
> Almost every new form of mortgage lending — from adjustable-rate
> mortgages to home equity lines of credit to no-money-down mortgages —
> has tended to expand the pool of people who qualify but has also been
> greeted by a large number of people saying that it harms consumers and
> will fool people into thinking they can afford homes that they cannot.
>
> Congress is contemplating a serious tightening of regulations to make
> the new forms of lending more difficult. New research from some of the
> leading housing economists in the country, however, examines the long
> history of mortgage market innovations and suggests that regulators
> should be mindful of the potential downside in tightening too much.
>
> A study conducted by Kristopher Gerardi and Paul S. Willen from the
> Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, Do
> Households Benefit from Financial Deregulation and Innovation? The Case
> of the Mortgage Market (National Bureau of Economic Research Working
> Paper 12967), shows that the three decades from 1970 to 2000 witnessed
> an incredible flowering of new types of home loans. These innovations
> mainly served to give people power to make their own decisions about
> housing, and they ended up being quite sensible with their newfound
> access to capital.
>
> These economists followed thousands of people over their lives and
> examined the evidence for whether mortgage markets have become more
> efficient over time. Lost in the current discussion about borrowers’
> income levels in the subprime market is the fact that someone with a low
> income now but who stands to earn much more in the future would, in a
> perfect market, be able to borrow from a bank to buy a house. That is
> how economists view the efficiency of a capital market: people’s
> decisions unrestricted by the amount of money they have right now.
>
> And this study shows that measured this way, the mortgage market has
> become more perfect, not more irresponsible. People tend to make good
> decisions about their own economic prospects. As Professor Rosen said in
> an interview, “Our findings suggest that people make sensible housing
> decisions in that the size of house they buy today relates to their
> future income, not just their current income and that the innovations in
> mortgages over 30 years gave many people the opportunity to own a home
> that they would not have otherwise had, just because they didn’t have
> enough assets in the bank at the moment they needed the house.”
>
> Of course, basing loans on future earnings expectations is riskier than
> lending money to prime borrowers at 30-year fixed interest rates. That
> is why interest rates are higher for subprime borrowers and for big
> mortgages that require little money down. Sometimes the risks flop.
> Sometimes people even have to sell their properties because they cannot
> make the numbers work.
>
> The traditional causes of foreclosure, even before there was subprime
> lending, were job loss, divorce and major medical expenses. And the
> national foreclosure data seem to suggest that these issues remain
> paramount. The latest numbers show that foreclosures have been
> concentrated not in places where real estate bubbles have supposedly
> been popping, but rather in places whose economies have stagnated — the
> hurricane-torn communities on the Gulf of Mexico and the industrial
> Midwest states like Ohio, Michigan and Indiana, where the domestic auto
> industry has suffered. These do not automatically point to subprime
> lending as the leading cause of foreclosure problems.
>
> Also, the historical evidence suggests that cracking down on new
> mortgages may hit exactly the wrong people. As Professor Rosen explains,
> “The main thing that innovations in the mortgage market have done over
> the past 30 years is to let in the excluded: the young, the
> discriminated against, the people without a lot of money in the bank to
> use for a down payment.” It has allowed them access to mortgages whereas
> lenders would have once just turned them away.
>
> The Center for Responsible Lending estimated that in 2005, a majority of
> home loans to African-Americans and 40 percent of home loans to
> Hispanics were subprime loans. The existence and spread of subprime
> lending helps explain the drastic growth of homeownership for these same
> groups. Since 1995, for example, the number of African-American
> households has risen by about 20 percent, but the number of
> African-American homeowners has risen almost twice that rate, by about
> 35 percent. For Hispanics, the number of households is up about 45
> percent and the number of homeowning households is up by almost 70 percent.
>
> And do not forget that the vast majority of even subprime borrowers have
> been making their payments. Indeed, fewer than 15 percent of borrowers
> in this most risky group have even been delinquent on a payment, much
> less defaulted.
>
> When contemplating ways to prevent excessive mortgages for the 13
> percent of subprime borrowers whose loans go sour, regulators must be
> careful that they do not wreck the ability of the other 87 percent to
> obtain mortgages.
>
> For be it ever so humble, there really is no place like home, even if it
> does come with a balloon payment mortgage.
>
> Austan Goolsbee is a professor of economics at the University of Chicago
> Graduate School of Business and a research fellow at the American Bar
> Foundation. E-mail: goolsbee at nytimes.com.
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