Refinancing Home Mortgage
In: Mortgage Lenders
26 May 2010Let’s be perfectly clear on this. I see and hear a lot of people blaming “mortgage crooks” and “greedy lenders” and “greedy borrowers buying homes they couldn’t afford.” Well, there are some horror stories like low-doc and no-doc – - – but almost all the mortgages were on the up and up – subprime yes but they all cash flowed at the rates then in place. And at the cost of funds then in place the banks’ models showed that their portfolios could handle the risk. And since they knew that short term rates would creep up and long term rates would lag them, they needed to go further out the risk/return curve to make any money – which since banks trade publicly they needed to do. Securitizing these mortgages was supposed to REDUCE risk because you were buying a piece of tens of thousands of mortgages, not banking on a handful of them.
The flow of credit into mortgages, like the flow of credit into the commodities markets, fueled a housing bubble similar to the commodities bubble (oil prices rose and then fell more than real estate prices).
This is your classic example of the interest-rate cycle as the Austrian School explains it.
The banks have complex models, they’re highly regulated, the regulations require them to follow the models, and the models showed that the risk was acceptable.
The reason the risk turned out to be unacceptable is that the Fed’s unsustainable monetary policy masked the inherent risk.
So the question – the $700BN question – becomes, is it the banks’ responsibility to sensitize their models for bad Fed policy?
If that’s their responsibility, rather than the central bank’s responsibility to maintain a stable monetary policy – then why have a central bank? Why not just let the market set interest rates?
Should we be reforming the banks? Or the central bank?
LeAnne yes CRA was a problem but don’t confuse the side show for the main act.
Risks were put on the back burner because the models masked how significant the risks were – because the models assume stable interest rates.
This is about mortgage information questions.
1 Response to Should the mortgage lenders have sensitized their models to account for inflationary Fed policy?
LeAnne
May 26th, 2010 at 1:37 am
We should be reforming both.
The actual risks involved with some of these loans were essentially put on the back burner and the immediate commission for the lender became paramount. It seems that any future instability in our monetary system or the ability of the buyers to repay these loans when the principal and interest moved into reality were not high on their priorities. Coupled with the pressure from the government to make home ownership more available to low income and minorities and a situation was created that was doomed to failure.
Obviously, there’s plenty of blame to go around and hopefully in the future there will be considerably more oversight and accountability and a system that can detect these trends and indicators and red flags before they become a $700,000,000,000 crisis.