Mortgage lending and leveling risks

MarketWatch, Nov 25

I wonder if our whole mortgage industry is somewhat skewed in favor of banks. You see, in morgage all the risk is on the buyer and all the benefits are to the bank. The only risk bank is taking is buyer's bunkrupcy, which is all-or-none game for them. In a case of ARM the risk is even more overhanging on the buyer. But if we are in a free market, why such an asymmetric deal?

If reguilations would require banks to share the risk of falling house values with the buyer, and put on hold payments for "underwater" portion of the loans or even lose that portion, they (banks) would be much more careful giving our mortgages in a bloated market. And banks have analysts,experts, and they are not under pressure to close the deal to have a place for the family to live in. With such regulation housing speculation will become nearly impossible as banks control real influx of money to the market, and we would get to the old good real market prices with just normal inflation adjustments.

I wonder if I should write about it to my congressmen and senators... sounds like they will discuss the topic in the near future in DC.

MarketWatch, Nov 26

Speaking of fantasyland and risks, let's see. A lot of subprime rates were given to uneducated people who just did not know the real value of their house and what it means for them. You may say that they "need to learn", and they do so right now! They are getting their houses foreclosed, their finances in ruins... Anybody’s happy?

See, if you want a functional economy, you have to have a lot of janitors, cab drivers, etc. and they are uneducated, that's why they are janitors and cab drivers. So, you have uneducated masses on one side and greedy banks on another side. You cannot get rid of any, and together they've proved to be a combustible mix.

Now, uneducated masses pay for their errors. But I don't see banks paying for their errors -- they are getting bailed out. In fact, they are getting bailed out every 7-10 years for the last several decades. That's NOT a leveled field. And "masses learning their lesson" does not work. You have to put some breaks on another side too.

I did not borrow against inflated price of my house. I’ve got it for ~$250 and refinanced a couple of times only 30-years fixed to decrease monthly payments. I know it’s not worth half a mil, even though it still would sell for that right now. But despite my education and right choices, I am still caught in a bad economy because stupidity and greed of others met each other. And you are caught in it too! So, now it’s not about learning, it’s about macroeconomics. It’s about OUR SYSTEM HAVING WRONG BALANCE SOMEWHERE.

Uneducated people don't have education or knowledge to recognize the problem. Banks do. Banks can distinct value of the house and price in overheated market. Banks should not give $500K loan for $200K house only because current prices are up in a bubble market. What I propose is not putting all risks on the lender, but PUTTING ONE SPECIFIC RISK on the lender, which they neglected for decades with national disaster consequences. In a sense, it’s about banks learning their lesson.

And if that will be in place, it won’t result in higher interest rates, because no interest rate can counteract loss of value after the bubble burst. It will result with banks lending only real value of the house, not a bloated price tag. “Yeah, friend, you see, seller asks for 1.5 mil, but the house only worth $350K, so that’s max we can give you for it.” And because most money on real estate market comes from banks, it will prevent further real estate bubbles.

BTW, THANKS EVERYBODY FOR YOUR COMMENTS AND CIRTICISM, it really helps to clarify thoughts and polish the idea.

Thanks for comments to:

lnardozi, awesley, ab420, JustTrade, seetheforest, 6TANGO, DC26, and Ostriches.