Thursday, August 16, 2007
Blowing Up The Market
I've probably got 2 posts left in me before I head to Austria and Germany on a well deserved (at least in my opinion) trip with just my wife. Hopefully that will tide people over before I get back. The first one is my mandatory "what happened on Wall Street!?" spiel and the other is my Voting Manifesto 1.0. I really want to get that one out, but we'll see what happens. Anyway, it's looking like the heads of some of these trading houses and/or mortgage firms might start doing the honorable thing like that Chinese toy manufacturer did any day now.
I'm sure that there is going to be intense pressure, especially if this ends up bringing down the bull market (we're only about 6% away from a bear market right now) for the whole mortgage industry to be regulated. Of course, all that will do is raise costs and eliminate some of the things people have been able to use to get ahead in the world. I'm the first to say that 90% of the mortgage options out there are lunacy. You have your ARM, where you get the low, low teaser rate until it goes variable, at which point if you haven't paid it off then you're in for some 80s style rates. You have the 40 year fixed, where you'll work most of your life to pay it off, then when you finally did, you'll turn around and get a reverse mortgage to get the money back. There's the no money down mortgage, where you can give the homeowning life a try without anything to back it up other than your name. Take a chance with the interest only mortgage, where you pay no principle for the first x number of years and hope for the best, and so on. The point is that while some of these are madness to even try to get in my opinion (I'm a straight 15 or 30 fixed man), but they have worked for people who aren't me.
Let's look at some of the benefits of all these different options. We have the highest rate of home ownership in the history of the country right now and people's net worth is higher than it's been in quite some time. However, there are people who have lost everything as well. While on the macro level, this has still created (and will continue to create) more than enough wealth to make it worthwhile, there are certainly problems on an individual level with foreclosures, bankruptcies, and so on. The solution to that isn't to regulate what kinds of loans can be offered or who can get them. If you're going to legislate risk, you might as well do away with investment vehicles like options, calls, and so on. After all, it's more risky to bet on an option than on real estate (in general).
What should happen is people should be more educated about their choices. A lot of that falls on the individual and if you choose not to learn about things, you choose to be ignorant and headed for a fall. There could be something from the SEC or someone that is a sanctioned information source, but I would stop there. If it's something that works for people and for lenders, let them go ahead and do it. They both take the risk and both share in the rewards. If we choose to start protecting people from their idiocy let's start with something far more basic, say banning cutlery or stoves or electrical appliances. That's where the real danger is.