The Wall Street Journal reports that Illinois is experimenting with mandatory credit counseling for people considering non-traditional loans:
Yet Illinois's experience to date shows how difficult it is to create even modest safeguards in the home-buying process. A previous pilot program similar to the new law was viciously attacked and rescinded in January, after only a few months. Instead of winning plaudits, the pilot program quickly became mired in charges that it would make it harder for minorities to buy homes. Mortgage brokers, fearing a loss of business, claimed that access to credit would tighten in the neighborhoods targeted by the law. Rumors flew that dozens of lenders had pulled out of the area.
The general response of economists is to dismiss this claim with a derisive laugh. If mortgage brokers find it harder to sell their wares when borrowers better understand the terms, then those are mortgages that shouldn't be sold.
But it isn't quite that simple. Much depends on the quality of the information given, which is why pro-choice activists often object to counseling requirements, and of course "crisis pregnancy centers" that counsel against abortion.
Even worse, there is some evidence from heterodox economics that more information doesn't necessarily make for better decisions. General economic theory dictates that the more information is available to participants in a market, the better ("more efficient") the outcomes in that market should be. But that dictum is not always borne out in economic experiments; sometimes more information makes things worse. And we're not talking about more information like "this is what your BABY looks like!" (or "it's just a clump of cells"). I mean more information about things with ostensibly neutral emotional valence, like the underlying value of traded assets.
Is an hour or two enough to give financially naive people good information about mortgages, or just to confuse them? Is the state biased towards being too conservative? Even if the information being given is good, is the information the borrowers are taking equally good? As any blogger knows, no matter how clearly and effectively you think you are explaining things, misunderstandings are rife.
I'm tempted to say that scaring low-income buyers off non-traditional mortgages is an obvious, unalloyed good, given what's happening in the property markets. But there's an uncomfortable whiff of the paternal about that instinct. 85% of subprime mortgages are still in good standing; presumably, many of those homeowners would not thank me for preventing them from buying their first house.
Much depends on the quality of the information given, which is why pro-choice activists often object to counseling requirements, and of course "crisis pregnancy centers" that counsel against abortion
I'm sure that you didn't mean it that way, but I hardly think that pro-choice activists would be happy with counseling requirements even if they were limited to facts about which there was no dispute (i.e., showing ultrasound pictures without describing them as 'babies' or whatever)
I don't know if I qualify as an activist, but I'm pro-choice and would be fine with counselling requirements limited to facts not in dispute and not set up to make getting an abortion procedurally more difficult (e.g., requiring in-person counselling with a waiting period). Other than that, no problem.
LizardBreath, any counselling requirement is, by definition, designed to make exercising one's free choice more difficult.
As to Megan's post, my understanding from the reading the Journal story was that there were not enough counsellors available leading to a backlog and extended wait times to clear the regulatory hurdle. In that case, the practical effect of the law is to make it harder for *any* mortgage transaction to to take place in the targeted ZIP codes.
Doesn't this depend on what the information being provided is?
Heck, I wonder what percentage of those subprime loans were sold by people who did NOT make it all that obvious exactly what the possible worst case would be when the rates were re-set.
I don't have too much sympathy for the lenders who got into this pickle. They were supposed to be the wise ones in this whole mess, judiciously looking at the history, assets and cash flow of the borrower and making a prudent decision. Part of that prudent decision should have been a careful explanation to the borrower and enough teaching so as to help the borrower to make a correct analysis of future risk and whether the borrower could, indeed, make the payments.
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