Tuesday, December 18, 2007

Subprime Solution

I should say "less than ideal" to be perfectly clear.

The Federal Reserve announced a "sweeping response" to the mortgage meltdown today; read the whole story here.

So, in summary, the Fed is acting to protect consumers from lenders who want to make them mortgages. Here's the key "reforms":

The proposal would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

While we're at it, shouldn’t government, at some level, protect people from credit card offers? How about protection from signing up for the wrong insurance coverage? Or, a true scourge of our times, icy roads? Clearly, walking or driving this time of year is dangerous; are we to bear that risk all by ourselves?

I’ve bemoaned this problem before. But until we start to be self-governing once again, this is only going to get worse.


Terry Morris said...

Sounds to me like the fed is trying to protect the lenders from the borrowers and the borrowers from the lenders, all at the same time. Or am I misreading something?

"The proposal would restrict lenders from penalizing risky borrowers who pay loans off early..."

I once rejected a loan on this very basis. I tried to bargain with the lender for no early payoff penalty, but the lender wouldn't do it. So I rejected the loan. What's wrong with that? What would have been wrong with my accepting the terms of the loan if that's what I decided to do. Why does the fed think it needs to protect me from me?


Michael Tams said...


You acted rationally and so did the lender. Lenders fix their positions - they use long term liabilities to match long term assets like a loan. Thus, the Fed is doubly interfering by turning the accepted business model on its head.

Would that more people acted rationally!


Anonymous said...

thanks for the link.....

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