HR 3915 is referred to as the Mortgage Reform and Anti-Predatory Lending Act of 2007. It was introduced by Congressman Barney Frank of Massachusetts. I explored some libertarian thought about the bill here. I spent the last few days, perusing supporting messages, to discover if I might be mistaken. This is what I found: The Center for Responsible Lending encourages support of this bill. Here is the letter they want you to write to your Congresspeople:I am deeply concerned about the plight of 2.2 million families who have lost their homes to abusive subprime loans, or who will lose their home in the near future. Without stronger protections against predatory lending, the same conditions that led to this disaster will inevitably come up again. The Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.R. 3915), which is based in part on existing state laws that have been effective, would help prevent another subprime disaster in the future. Hmmm, well they fired a biased shot across the bow by referring to subprime loans (in general) as abusive. It lets you know that they despise any loan that isn’t an “agency” loan. The CRL also predicts that (a) more people will lose their homes (b) the disaster, left unchecked, will happen again. What they don’t tell you is that the innovative lending products added some ten million NEW homeowners to the ranks this decade. While 2 million foreclosures suck, a net gain of 8 million homeowners is nothing short of astounding. The bill addresses many abusive lending practices that directly contributed to today’s foreclosures crisis, including reckless loan underwriting, abusive subprime prepayment penalties, and direct incentives for mortgage brokers to steer families into excessively expensive and risky loans. Basically, the bill would allow consumers to have greater confidence that subprime lenders will refrain from reckless lending and assess whether complex loan products are truly affordable for the families that receive them.
Ho ho ho! Reckless, abusive, and steering! Underwriting is to protect the lenders, not the borrowers. Here comes Big Momma to tell me I can’t hand out MY money to THIS homeless guy because he’s not deserving of it. When we seek to protect the irresponsible few by punishing the responsible majority, we encourage vigilantism. Disclosure to borrowers: $350,000 IS a lot of money and you ARE expected to pay it back. Ask an attorney for an interpretation of that disclosure. I urge you to co-sponsor this important bill, if you haven’t already. In addition, I urge you to support making the bill stronger for families who are victims of abusive subprime loans. When Wall Street demands riskier loans for higher returns on investments, it must accept its fair share of accountability. Stronger remedies and “assignee liability” provisions would ensure that victims have access to effective legal remedies, regardless of who owns their loan. Without adequate legal remedies and enforcement, the market will have less incentive to make real changes, and many of the protections included in the bill could become much less effective in preventing predatory lending practices. Wall Street IS accountable for yield reaching; ask Stan O’Neal or Warren Spector. Failure is always the best disincentive.
H.R. 3915 includes common sense protections that responsible mortgage lenders have always used. Please make a decision to combat predatory lending and boost our nation’s economy by promoting sustainable homeownership. Good grief! If there was ever an ode to victimization, this letter would be it. Irresponsible borrowers account for less than 5% of the households in America. We bandy about the phrase, “predatory lenders” too much. Predatory lenders are criminals- enforce the laws against fraud and throw those bums in jail. Irresponsible borrowers got drunk on the liquor of materialism. Let them suffer the malaise of foreclosure so that the principles of abstinence or moderation will prevail the next time they are tempted to borrow.
I’m not passing the buck- I’m laying the blame squarely where it belongs- on the pie-in-the-sky borrowers whose financial plans were based on third grade math and the greedy investors whose model relied on first grade math. Messrs. Miller, Watt, and Frank would do well to stop meddling in markets; 95% of the American public will suffer for the greed of the feckless few.
The danger behind this bill is that it doesn’t regulate the proper parties. When you read through the text, you’ll discover that there are two entities that are shouldering the brunt of the blame for the meltdown of the sub-prime mortgage market: originating firms and Wall Street securitizers. The bill stops short of levying any responsibility to the two most interested parties: borrowers and lenders (the individual investors). This bill exonerates them of the responsibility of due diligence. Experience is the best instructor. An investor needs to lose 10% of his mortgage pool investment and a borrower needs to have his home foreclosed. That experience will instill a sense of personal responsibility in both parties. While loss of investment principal and foreclosure are devastating experiences, the old adage “time heals all wounds” truly is appropriate. Jane Shaw, discussing Public Choice Theory:
Public choice takes the same principles that economists use to analyze people’s actions in the marketplace and applies them to people’s actions in collective decision making. Economists who study behavior in the private marketplace assume that people are motivated mainly by self-interest. Ms. Shaw further exposes the dangers of regulation to correct market failure:
In the past many economists have argued that the way to rein in “market failures” such as monopolies is to introduce government action. But public choice economists point out that there also is such a thing as “government failure.” That is, there are reasons why government intervention does not achieve the desired effect. This bill will provide a false sense of security to the consumer and encourage even more irresponsible behavior. Rather than let the instructional nature of failure naturally correct the market, the regulation would contract the industry so as to dissuade innovation and competition. The scoundrels will fleece the ignorant under the protective cloak of a highly regulated industry- it happens on Wall Street daily.
Big lenders will support this bill because it allows them to narrow the eye of the needle through which future borrowers will pass . Ms. Shaw illustrates this theory with the anti-competitive nature of the Clean Air Act of 1977; the polluters, in Rust Belt states, screamed for regulation so that the more nimble Sun Belt firms couldn’t open. The regulations protected the very scoundrels who should have been allowed to fail. Peter Van Doren illustrates this theory, applied to banking, for the Cato Institute:
Supposedly, banks are regulated and bank deposits are insured to correct defects in the market for information about the quality of banks’ investments. But, again, recent scholarship indicates that the threat of runs on banks induces banks to make sounder investments. And healthy banks can form private associations to insure one another against runs that are motivated by fear, not facts. Even in the Depression, most banks closed by runs were insolvent and should have been closed. Instead of making banks sounder, regulation (especially restrictions on branch banking) and deposit insurance simply allowed smaller (and usually weaker) banks to survive against their larger and more efficient competitors. This is why the scoundrels support this bill. A free market would allow for upstart competitors to gain market share from the wounded giants. Rather than suffer from their poor lending practices, big lenders will benefit from the high barrier to marketplace entry this bill promotes. Allow failure. Foreclosed borrowers will think twice about leveraging up their next ranch to buy a Hummer. Investors will demand that lending decisions fall within acceptable risk parameters. If we deregulate the lending industry rather than tighten the laws, the American homeowner and American investor will emerge from the protective cocoons of ignorance as beautiful butterflies. Pass this bill and they will emerge like moths, serially attracted to the only source of light they know.
That light is government promoted ignorance
