Who could possibly have seen this coming? [Arnold Kling]:
Servicing [of mortgages] has been traditionally a very low-margin business, with the whole ballgame about keeping costs low.
Back in 2009, policy makers treated mortgage servicers like a piñata. They beat on servicers to provide foreclosure relief, loan modifications, and so forth. They told them to administer new programs that combined loan origination procedures with loan servicing procedures. They sought to punish servicers for noncompliance.
Well, guess what. Now servicers do not want anything to do with any loan that might become delinquent. The cost of dealing with such loans has skyrocketed, thanks to Washington’s piñata-bashing. So if you originate a loan to someone with a low credit score, the servicer charges a hefty premium. That in turn means that risky borrowers either have to pay that premium or get rationed out of the market altogether.
Not wholly unrelated: Sunday’s Washington Post laments that home values in suburban Prince George’s County, Maryland have not bounced back from the crash the way those in Reston, Va., have, and discerns a racial-injustice angle. Unfortunately, it misses a big legal angle that might explain some of the difference, about how the two states’ laws and lawmakers reacted to the foreclosure wave. And: more from Arnold Kling.
5 Comments
“That in turn means that risky borrowers either have to pay that premium or get rationed out of the market altogether.”
And that would be a good thing, would it not? It seemed with the ’08 mortgage bubble one major problem was that it was a game of musical chairs, with everyone in the game knowing that there was a ton of bad debt, but each party believing that they could successfully pass the buck in time.
This practice now merely fines who shall be the looser in advance, and now the true cost of each mortgage might actually be incorporated in the original transaction. High risk borrowers should pay more.
Check your privilege, gasman. Your reason and risk allocation have no place here.
Buried in the article are mentions of refinances. While they don’t actually say “cash-out”, I can’t imagine there would be anything else. Which means that, for the most part, the bank might have handed them a shovel but the owners dug their own holes.
No need to allocate blame, Density. There’s plenty of it to go around, from Congress to the regulators to the banks to the people who borrowed money to play musical chairs. The real issue so far as I am concerned is that the people on high who set the game in motion did not bear any consequences — except for Alan Greenspan, who was having trouble refinancing a mortgage. Everyone but me seems to think that is a glitch in the market. I prefer to think of it as karma.
Next time around, folks, bear in mind: the reason to buy a house is because you wish to own a house. Learn the difference between the words “investment” and “speculation”.
Bob
As with any other good or service, if you can’t afford it, you shouldn’t buy it in the first place; as true of mortgages as of anything else.