Imagine a man who at the time of the bubble in the housing market speculated real estate. He bought the house, avoiding the cash and no mortgage loan with a floating rate. But before he managed to sell the house and get the benefit, the market collapsed. Its debt exceeded the value of the house, but he knew that under the laws of the State Bank can not require him to repay the loan in court if he would convey the property in foreclosure. What this man? In recent years, in a similar situation turned out several hundred thousand people who had abandoned their investments in real estate. Mortgages with interest only payments at the beginning of the period made by speculators in the states with laws that simplifies the procedure of default caused by excessive number of exemptions for non-payment of real property and are considered the main threat to the security of the financial system of America. That forced the Obama administration to take action to establish a commission on security products to protect homeowners from dangerous loans. This decision is based on the assumption that the financial crisis was triggered by predatory lenders to hapless borrowers used to their advantage. But do consumers need protection? Or commission them to make the search for urgently needed loans and make the process more expensive?
The idea of establishing a commission on the safety of financial products came to Elizabeth Warren, Harvard professor and chairman of the Committee of Congress to oversee the program of saving the banks. She argues that the need to establish a commission is due to this situation, when the consumer is protected from buying a toaster, which can explode, with a probability of one to five, but could get a sub-mortgage, which in one case out of five leading to the recovery of housing for non-payment. But in this simple analogy, something is missing. Toaster presents a dangerous threat to any buyer. A loan is not dangerous for all. Almost any loan product has some value for a consumer. Loans that require minimal documentation, are perfect for homeowners who have large numbers of its own capital and wish to refinance their mortgage loans (even if they pose a risk to speculators). Unlike buyers of toaster, borrowers have repeatedly warned about when their loan "explode." The number of exemptions for non-payment of housing has risen across the country, but pockets of the epidemic there in Las Vegas, Phoenix, Miami and the area of California, entitled "Internal Empire". Here, the number of seizures in the 5-10 times higher than the national average. In these regions, bursting bubbles in prices that has caused the transfer of many homeowners, whose debts exceed the value of homes, their rights to the mortgagee.
Treatment for all consumers as to the innocent victims and an unwillingness to recognize that many of them were reasonably react to stimuli, may lead to unintended consequences. The regulation may have the opposite effect and increase the cost and complicate access to credit. Take for example the penalty for early repayment of the loan in sub-mortgage lending. Banks are fine, because the early repayment of the loan reduces their profitability, while sub-loans, and so less profitable than the standard. Empirical studies show that among the collection of penalty for early repayment of loans and growing up the number of exemptions for non-payment of real estate there is no connection. Nevertheless, consumer advocates argue that the fines - it is one of the reasons plachevogo holders of sub-mortgages. If the words of lawyers listened, penalties for early repayment would be abrogated. But if this happens, lenders are likely to become suspicious charge borrowers higher interest rates. Ironically, higher interest rates would have increased the probability of default of the owners of substandard mortgages. The lack of penalties for early repayment of standard loans has further aggravated the housing problem of seizure for non-payment. Millions of Americans seized the investment capital from their homes by refinancing (in fact, paying old loans with new and larger). This increased the likelihood that these homeowners will suffer in the first place in the event of the fall in housing prices.
In Europe, the value of the property also fell. But there the number of seizures of homes for failure to pay lower in part because landlords have seized the investment capital from their homes, to a lesser extent. In addition, mortgage loans with floating rate - this is a standard phenomenon in Europe, and in the United States at that time they were also very common. It is unpredictable monetary policy the Federal Reserve led to the "explosion" of floating-rate mortgages, not credit. From the examples described show that in the 30-year mortgage loan at a fixed rate with an absolute right of early redemption nothing terrible. According to news agency Associated Press, supporters of the Commission on the safety of financial products believe that the 30-year mortgages at a fixed rate should be the gold standard with which you want to compare the "risk" or "exoticism" of all other mortgages. Excessive desire for simplicity endangers not only innovation but also competition. Thirty years ago credit cards were very simple. For the right use of their assigned high annual fee (usually $ 40 - $ 50) and high interest rates (up to 20%), in addition, there was no discount for cash purchase. Today credit cards have become not only difficult, but better. No need to make an annual contribution for ordinary credit card, have a flexible interest rates and various benefits. In the presence of a multiple-choice consumer reigns fiercely competitive.
Interestingly, the security of financial products would be allowed such a dramatic change in credit cards? And the last concern for the Obama administration proposed a new commission due to the increased powers of government agencies. Ultimately, it is a conflict of interest committee and the leadership of the Fed. If the commission would have the right to judicial enforcement, including the ability to impose large fines, she one day might undermine the reliability of financial institutions and enter into conflict with the Fed. Such problems create regulatory inconsistencies and provoke political battle for a place under the sun, which strenuously fought Obama administration. Rather than create a commission on the safety of financial products to Washington should review the process of seizure of real property for non-payment of taxes and other incentives that encourage excessive investment in real estate, as well as the reasons, which homeowners abandon their homes. Our current problems are caused by the mismatch of incentives and a reasonable reaction to them by consumers and creditors. The problem is not to protect consumers. The new agency, based on the erroneous belief that the consumer must be protected from himself is likely to bring more harm than good.
Mr. Zhivitsky - Professor of Jurisprudence from George Mason University and Senior Research Fellow in the Research Center of the University "Merkatus.
The idea of establishing a commission on the safety of financial products came to Elizabeth Warren, Harvard professor and chairman of the Committee of Congress to oversee the program of saving the banks. She argues that the need to establish a commission is due to this situation, when the consumer is protected from buying a toaster, which can explode, with a probability of one to five, but could get a sub-mortgage, which in one case out of five leading to the recovery of housing for non-payment. But in this simple analogy, something is missing. Toaster presents a dangerous threat to any buyer. A loan is not dangerous for all. Almost any loan product has some value for a consumer. Loans that require minimal documentation, are perfect for homeowners who have large numbers of its own capital and wish to refinance their mortgage loans (even if they pose a risk to speculators). Unlike buyers of toaster, borrowers have repeatedly warned about when their loan "explode." The number of exemptions for non-payment of housing has risen across the country, but pockets of the epidemic there in Las Vegas, Phoenix, Miami and the area of California, entitled "Internal Empire". Here, the number of seizures in the 5-10 times higher than the national average. In these regions, bursting bubbles in prices that has caused the transfer of many homeowners, whose debts exceed the value of homes, their rights to the mortgagee.
Treatment for all consumers as to the innocent victims and an unwillingness to recognize that many of them were reasonably react to stimuli, may lead to unintended consequences. The regulation may have the opposite effect and increase the cost and complicate access to credit. Take for example the penalty for early repayment of the loan in sub-mortgage lending. Banks are fine, because the early repayment of the loan reduces their profitability, while sub-loans, and so less profitable than the standard. Empirical studies show that among the collection of penalty for early repayment of loans and growing up the number of exemptions for non-payment of real estate there is no connection. Nevertheless, consumer advocates argue that the fines - it is one of the reasons plachevogo holders of sub-mortgages. If the words of lawyers listened, penalties for early repayment would be abrogated. But if this happens, lenders are likely to become suspicious charge borrowers higher interest rates. Ironically, higher interest rates would have increased the probability of default of the owners of substandard mortgages. The lack of penalties for early repayment of standard loans has further aggravated the housing problem of seizure for non-payment. Millions of Americans seized the investment capital from their homes by refinancing (in fact, paying old loans with new and larger). This increased the likelihood that these homeowners will suffer in the first place in the event of the fall in housing prices.
In Europe, the value of the property also fell. But there the number of seizures of homes for failure to pay lower in part because landlords have seized the investment capital from their homes, to a lesser extent. In addition, mortgage loans with floating rate - this is a standard phenomenon in Europe, and in the United States at that time they were also very common. It is unpredictable monetary policy the Federal Reserve led to the "explosion" of floating-rate mortgages, not credit. From the examples described show that in the 30-year mortgage loan at a fixed rate with an absolute right of early redemption nothing terrible. According to news agency Associated Press, supporters of the Commission on the safety of financial products believe that the 30-year mortgages at a fixed rate should be the gold standard with which you want to compare the "risk" or "exoticism" of all other mortgages. Excessive desire for simplicity endangers not only innovation but also competition. Thirty years ago credit cards were very simple. For the right use of their assigned high annual fee (usually $ 40 - $ 50) and high interest rates (up to 20%), in addition, there was no discount for cash purchase. Today credit cards have become not only difficult, but better. No need to make an annual contribution for ordinary credit card, have a flexible interest rates and various benefits. In the presence of a multiple-choice consumer reigns fiercely competitive.
Interestingly, the security of financial products would be allowed such a dramatic change in credit cards? And the last concern for the Obama administration proposed a new commission due to the increased powers of government agencies. Ultimately, it is a conflict of interest committee and the leadership of the Fed. If the commission would have the right to judicial enforcement, including the ability to impose large fines, she one day might undermine the reliability of financial institutions and enter into conflict with the Fed. Such problems create regulatory inconsistencies and provoke political battle for a place under the sun, which strenuously fought Obama administration. Rather than create a commission on the safety of financial products to Washington should review the process of seizure of real property for non-payment of taxes and other incentives that encourage excessive investment in real estate, as well as the reasons, which homeowners abandon their homes. Our current problems are caused by the mismatch of incentives and a reasonable reaction to them by consumers and creditors. The problem is not to protect consumers. The new agency, based on the erroneous belief that the consumer must be protected from himself is likely to bring more harm than good.
Mr. Zhivitsky - Professor of Jurisprudence from George Mason University and Senior Research Fellow in the Research Center of the University "Merkatus.
From The Wall Street Journal
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