While many agree that the current wave of delinquencies and foreclosures will strain households and communities, there is considerable disagreement as to whether govern¬ment involvement is advisable, and if so, what shape it should take. Proposals for different forms of government in-tervention or assistance have been suggested by lawmakers, advocacy groups, and concerned citizens, among them: a) More complete, accurate and intelligible disclosures to borrowers b) Prohibition of unambiguously predatory conduct c) More stringent underwriting standards d) Assistance with renegotiating mutually acceptable refinancing to avoid foreclosure
e) Consumer education f) Taxpayer-funded loans to borrowers experiencing or acing delinquency or foreclosure g) Restrictions on the rights of lenders to pursue foreclosure against borrowers now or soon to be in default (Vigdor) Each of these types of action creates a different kind of eco¬nomic incentive for lenders, borrowers, investors and other stakeholders; each differs in the extent to which it interferes with a person’s freedom to contract and each differs in the cost of execution, and who bears that cost: taxpayer and consumer bystanders, or those who ac¬cepted responsibility for subprime loans in the first place.
(Vigdor) Moreover, a number of proposals focus on forward-looking changes to the environment in which subprime loans would be offered and negotiated. They are targeted not at today’s borrowers, but at those who may become subprime borrowers in the future. Broadly speaking, none of these provisions involve interference with existing contractual arrangements; rather, they seek to ensure that borrowers and lenders act truthfully and responsibly, and that their decisions are well-informed. Many focus on the need for better disclosures to borrowers.
“The information that borrowers receive about their loans through advertisements and disclosures may not fully or effectively inform them about the risk of AMPs. Federal and state banking regulatory officials ex¬pressed concern that advertising practices by some lenders and brokers emphasized the affordability of these products without adequately describing their risks. ” (Thompson, 10-12) Where information is the problem, disclosure is the solu¬tion. In May 2007, Federal Reserve Chairman Bernanke characterized more effective disclosures as the “first line of defense against improper lending.
” Beyond disclosures, Bernanke have suggested that certain specific lending practices should be prohibited—but Bernanke would prohibit only those capable of “bright line” delineation, which are “never, or almost never, legitimate. ” (Bernanke) States already can regulate abusive practices that harm consumers. Federal regulation imposing greater uniformity in the definition and prosecution of abusive subprime lend¬ing may be preferable to a patchwork of potentially incon¬sistent state regulations, or more nebulous standards of be¬havior.
Borrowers, moreover, are more likely to understand and exercise their rights if they are protected by uniform federal standards. A third form of forward-looking governmental involvement is establishing and encouraging best practices by lenders and brokers, what Chairman Ber¬nanke referred to as “principles-based guidance combined with supervisory oversight. ” (Bernanke) Thus, recent statements and guid¬ance go directly to many of the root causes of the current sit¬uation, helping to prevent future harm by prohibiting some of the most unreasonable and risky lending practices and compelling a return to sound underwriting.
The guidance and oversight process would thus seem to be a legitimate, desirable, and—based on recent developments—effective form of government involvement. Given the potential for market failure arising from incomplete information in this inherently risky market, government action in the form of regulation promises to improve the market’s functioning in the long run. A number of proposals at the state and federal level focus on assisting existing borrowers who may face delinquency or foreclosure today for loans taken out in the past.
These proposals tend to contain one or more of the following ele¬ments: Financial assistance to the borrower, including offering to lend money to a borrower in order to repay a loan that is already delinquent or in foreclosure (often re¬ferred to as a “bailout”); Prohibitions against foreclosure for some specified time period (“moratoria”); Assistance and encouragement to borrowers and lenders willing to renegotiate the terms of their loans. Conclusion
The current subprime mortgage situation reflects the pre¬dictable result of simple economic forces: greater access to credit meant more home buyers bidding up home prices, increasing the demand for mortgage products with “afford¬ability” features, attracting more brokers and lenders to the market, who competed for more borrowers, who bid on more homes, causing prices to rise, but not one that could last forever. When the boom turned to bust, as it has before, lenders and borrowers alike were left to face the consequences of their choices.
We can learn from the current problems, and take reason¬able steps to help lenders and borrowers make well in¬formed decisions in the future. Government cannot stop the housing market from expanding and contracting, but it can make future contractions less painful: It can require that borrowers receive complete, accurate and intelligible information about mortgage products. Mortgage risks created by ignorance or greediness can and should be reduced.
But risk cannot be eliminated from the process; it is an inherent part of the mortgage market. Bailouts and moratoria alter the mutually agreed-upon risk sharing between lender and borrower, undermine the ex¬pectation that contracts will be enforced as written, and al¬ter borrower and lender behavior in ways that make those measures unlikely to achieve their intended goals, while their costs are borne primarily by taxpayers and consumers who played no role in creating the problem.
They are not the solution.
Arnold R. K. Viewpoint, INSIDE MERS (MERS Inc. ), May-June 2004: 1. Bernanke S. “Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition” May 17, 2007. 21 Mar. 2008 <http://www. federalreserve2008. gov/ Boarddocs/speeches/2007/20070517/default. htm>.