Subprime Daily Briefing, Dec. 26
By Arnold Kling
Just one lame op-ed.Michael S. Barr, Sendhil Mullainathan, and Eldar Shafir write
Eligible borrowers would be offered a standard mortgage (or set of mortgages) and that’s the mortgage they would get — unless they choose to opt out in favor of another option, after honest and comprehensible disclosures from brokers or lenders about the risks of the alternative mortgages. An opt-out mortgage system would mean borrowers would be more likely to get straightforward loans they could understand.
…if default occurs when a borrower opts out, the borrower could raise the lack of reasonable disclosure as a defense to bankruptcy or foreclosure. If the court determined that the disclosure would not effectively communicate the key terms and risks of the mortgage to the typical borrower, the court could modify or rescind the loan contract.
That may be a solution for predatory lending. But the problems of predatory lending have yet to surface. We are seeing loans defaulting within 12 months of origination, with no interest-rate resets. The problem there is predatory borrowing–we have people living in (or speculating in) houses that they are not qualified to buy.
The big misunderstanding is not over the terms of the mortgages. The really serious misunderstanding, which applied to lenders just as much as to borrowers, is that house prices do not always go up.