The Subprime Non-Crisis

While the rest of the country weathers the "subprime" crisis, the 29th district seems to be suffering little in the face of the "mortgage meltdown".   Though we will experience the nationwide recession, it won't be worsened by the burst of a housing market bubble.  The housing market in the region has been fairly stable compared to the unsustainable growth typical of the top urban areas of the country.

Given that we've dodged the worst of the mortgage bubble, I wondered why Randy Kuhl co-sponsored a bill to provide a one-time $10,000 tax credit to home buyers.  In Monroe County, this tax credit will apply to homes costing as much as $417,000.  This bill, HR 5670, expires in one year.

There's nothing really wrong with this bill -- if housing prices are falling yet prospective homeowners are feeling skittish about the market, this tax credit might get them to make the jump and therefore stimulate the market.  It might also get them to make a bad investment if they mis-time the bottom of the market, but that's always a risk.

The real issue with the bill is that it won't do much good.  The fundamental driver behind weak housing demand is lack of credit, not fear of taxes.

Mortgage originators have been burned by insiders and outsiders gaming the system, and by over-leveraged borrowers.  A "subprime" mortgage is another name for a low- or no-downpayment mortgage.  When a borrower has no equity, they're more likely to exit their home than make payments.  Even if a borrower made a significant downpayment on their first mortgages, many took out home-equity lines of credit which put their debt at 100% of the value of their home. 

The net result is that borrowers in this market will face extreme scrutiny and will also be expected to make a significant downpayment.  Since a lot of prospective homebuyers were expecting to be able to get into a home with low downpayments, they're going to have to save up longer than expected.   At least in the short-term, easy mortgages based on sketchy applications are a relic of the past.  It will probably take years for the market to adjust to this new reality, and $10,000 in tax credit won't alter that fact.


"The net result is that borrowers in this market will face extreme scrutiny and will also be expected to make a significant downpayment. " - Not a bad thing!

I really don't think our government should do anything to help out on this issue. People knew what they were getting into and also common sense would tell you that flexible mortgage rates are a big gamble.

"People knew what they were getting into"

I agree -- in general. I think there are some cases where unsophisticated mortgage buyers were sold subprime loans they couldn't afford when they could afford a 30-year fixed mortgage. But those cases are a tiny minority.

Some of the crap that was going on in Southern California is mind-blowing. http::// is a good place to look if you have a strong stomach.

"unsophisticated mortgage buyers" - another big problem is unsophisticated credit card users. If we help one group, we should help the other.

I don't advocate major bailouts. There are a couple winding their way through congress which sound kind-of OK, but the reality is that any bill that isn't a moral hazard won't help many people.

Credit marketing needs some changes. Credit products are too complex, and that we should increase transparency and simplicity.

First, mortgages. Since the government backs many of them, there should be a "standard 30 year mortgage" contract. I don't know why it shouldn't be more than a page or two. Costs and fees would be summarized in a simple table. Then, any mortgage product that diverged from this one would have to disclose how much more it costs over the life of the contract, compared to this 30-year standard.

On credit cards, the use of fees as proxy for interest needs some limitations. These cards are full of fees which essentially amount to usurious interest. Again, a "standard credit card contract" should be devised and deviation from that will need special disclosure. Again, this should be a very short contract.

Credit is a product, and I don't see how a little regulation of the type I've outlined above would hurt credit providers, just as car dealers have to follow a set of disclosure rules.

I like your thoughts - things should be simpler and more transparent - I don't like bailing anyone out because there is no lesson learned and the odds are that the activity will repeat. My favorite is the government giving people money to rebuild their house in the same location that it has been under water three times before.