John C. Weicher
The crisis in American housing and financial markets started in February 2007 when a number of large mortgage lenders began reporting unexpectedly large losses on their portfolios of subprime mortgages, or securities backed by subprime mortgages. In human terms, this means that families were, and still are, unable to make the monthly payments on these mortgages. As they defaulted, the lenders foreclosed, and the families lost their homes. Since August 2007, the federal government has been working with private lenders to help these families stay in their homes in two ways: first, to enable homeowners to refinance their subprime loan into a mortgage insured by the Federal Housing Administration that carries more favorable terms; and second, to encourage lenders to engage in “loss mitigation” — modifying the payments on the mortgage for a period of time, or modifying the loan itself so that the homeowner owes a smaller amount or has a lower interest rate.
A common theme in these efforts and in other proposals and public discussion generally, has been to make sure that only the “deserving” are receiving help. There is an effort to distinguish the family that is trying to make its mortgage payment but has run into problems beyond its control — a decline in property values, loss of a job, or illness — from the family that never had any particular intention of making payments on the mortgage. This draws on a distinction in social welfare policy between the “deserving poor” and the “undeserving poor,” reinforced by the concern of families who are paying both their taxes and their mortgages that their taxes should not go to help people who are not trying to help themselves and should never have bought a home in the first place.
This effort to identify the deserving is futile and counterproductive, for two reasons. First and more fundamentally, we do not know the intentions of these families; we cannot know what they were thinking when they bought the house two or three years earlier. As private citizens, we may be able to offer an informed judgment about the motivation of people we know well, but the government cannot and should not make these judgments; both arbitrary rules and discretionary decisions can be too easily abused. Consider a lower-income family hoping to buy a home for the first time: the terms of the transaction may indicate, especially after the fact, that the family may not to be able to make the payments over the duration of the loan; but the family itself may have relatives or friends who bought homes under similar terms a year or two earlier and the brother-in-law or the coworker is doing fine and the value of the home is rising. Is this family’s decision to buy a home, with a subprime mortgage, motivated by a desire to improve its economic position, or by greed — by good or bad intentions? Who can know?
This hypothetical example leads to the second reason. The process of buying a home, and still more the process of taking out a mortgage, is very complicated, and often bewildering to first-time buyers. People often fail to fully understand their commitments and the consequences of those decisions. (Indeed, a friend with experience in the mortgage business comments that lenders themselves often did not understand the loans they were making, but that is a different matter.) This is especially true for some of the new types of mortgage instruments that developed in recent years. One of the most common such subprime mortgages is the “2/28” — a 30-year loan with a very low interest rate for the first two years, which then adjusts according to rates in the prevailing mortgage market. These adjustments can be steep. A young man of my acquaintance bought a condo with such a mortgage: for the first two years, his mortgage rate was three percent; then it suddenly rose to nine and a half percent, and since then it has changed every month. The market rate over these years has been about six percent. He attempted to refinance into a market-rate loan, but the lender would not let him do so until he had paid the nine and a half percent rate for at least one year.
It can be argued that the young man got a “deal” for two years and has no real grounds for complaint: three percent for two years and nine and a half percent for one year is cheaper than six percent for three years. But the lender never explained the loan to the young man, and he didn’t know how to read the loan documents or what questions to ask. Such actions by a lender can be considered one type of predatory lending: if the lender does not fully explain the loan, the borrower cannot make an informed decision. Is this young man “deserving”? To my mind, yes; others may simply feel he should have known better. How does a federal government program decide the question?
Attempting to pass retrospective judgment on people’s motivations — the motivations of literally millions of people — is a moral and practical mistake. It is far better to base the decision as to who deserves help on the basis of objective information: the current financial situation of the homeowner and their efforts to meet their financial obligations. The determination of “deserving” should be left to a higher authority.email print