Keep feds out of mortgage market

The mortgage/real-estate crisis has become big news lately, and there’s been plenty of finger-pointing. Here’s my take on this situation.

First of all, there really is no one to blame. All financial markets have upswings and downswings, including real estate. Interest rates were low and many people wanted to buy homes. Home prices went up and still more people wanted to buy, believing they needed to get in before it was too late.

Wall Street investment managers, combined with lenders, designed mortgages that allowed riskier and riskier loans to be approved, including the now (in)famous sub-prime loans. The lenders and borrowers were banking on the belief that home values would continue to rise, so that even if the home buyers had to sell their homes in a few years, they would still make a profit and the lenders would not have to bear the heavy expenses of foreclosing.

But now our increasingly scary economy, combined with the declining real-estate values and the overly loose underwriting guidelines of the lenders, has caused a large upswing of foreclosures. Many lenders have gone out of business. Around 10 percent of subprime borrowers are in default. And those borrowers who lose their homes will go back to renting, which apparently everyone now thinks they should have been doing all along.

Many in the media and in Congress have blamed the mortgage brokers for the problem because, after all, we originated many of these loans. But all mortgage brokers can do is offer to the consumer the types of loans that are provided to us. The banks are the ones who designed and approved these loan products; brokers just package the loan documentation and send the package to the lenders.

The mortgage marketplace has already responded to the mortgage crisis by tightening up underwriting guidelines and by eliminating some types of loans altogether, but the government wants to step in and make things even more difficult. A bill has just passed the House of Representatives, HR 3915, and will be going to the Senate. It will essentially shut down the subprime market completely by mandating interest-rate and pricing restrictions that will make this type of loan so risky and unprofitable that lenders and originators will not want to make them.

The bottom line is that there will be many fewer people able to buy homes, forcing down real-estate prices. And those current sub-prime homeowners who need to refinance in order to keep their home will be unable to do so, again pushing down values.

The government intervention in this marketplace will only make things worse, maybe disastrously.