The Federal Reserve just announced new proposed mortgage rules aimed at cutting down on shady lending practices.
As far as I can tell, this is one of the most absurdly cosmetic measures ever undertaken, and I include the bizarre decision to split banking and underwriting in the wake of the 1929 stock market crash. The rules seem to be mostly aimed at curtailing abuses such as excessive prepayment penalties, which to a first approximation is a problem for exactly no one in the current mortgage market. Even the mighty reporters in the the Wall Street Journal's newsroom couldn't really find anyone to say that this was going to, y'know, actually affect anything.
I can't really find much to object to in the new rules (though, of course, I am not a mortgage banker.) But the proposal was greeted with much fanfar, simply because the headline has the words "mortgage" and "Federal Reserve" in it. Presumably this is what the Fed was aiming for: a bid to calm the markets without actually enacting any regulations that could have nasty side effects. And at that, as a strategy it sure beats "time to get in there and change everything!"
Presumably this is what the Fed was aiming for: a bid to calm the markets without actually enacting any regulations that could have nasty side effects. And at that, as a strategy it sure beats "time to get in there and change everything!"
I thinking that's correct. It happens all too often in Washington that something goes wrong, the media and the politicians call it a "crisis," and then enact a bevy of new regulations that only make things worse.
Vernon Smith has an interesting op/ed in today's Journal pointing out how previous government interference helped to create the housing bubble. As Smith argues, a tax change in 1997, the GSE's, the mortage interest deduction and an overly accomodative Fed helped to create the problem.
What's the solution? The government could help the most by staying out of it. Forget about phony stories about "predatory lenders" and misleading talk about "teaser rates." Let lenders and borrowers who took irrational risks suffer the consequences, else they'll do it again. Let creative destruction roll.
Actually, the excessive prepayment penalties are an important component of the problem. It's not they are problematic in themselves. Rather, it's that they enable other problematic practices. Prepayment penalties are what enable "teaser" rates and some of the more egregious ARM schedules, because without prepayment penalties the borrower would just finance for the teaser period, and then refinance, possibly serially. With nothing but the fees on the new mortgage, there's not much to stop 'em, after all.
A very simple way of telling if a mortgage has hidden time-bombs is to check if it has a pre-payment penalty. Without one, things pretty much have to be on the up-and-up, and there's little reason for a reasonable mortgage to include them. Simply banning prepayment penalties as unconscionable would offend my somewhat-libertarian sensibilities, but not by very much. Limiting them is probably the least intrusive way of preventing the current unpleasantness from recurring.
Of course, it doesn't do anything to help those currently in need, but that's clearly Treasury's issue, if anyone's, and definitely not the Fed's.
Its too late for the people with time bomb morgages, but wouldn't it keep people from easily and more cheaply refinance. Refinancing is a form of early payment, isn't it?
"Prepayment penalties are what enable "teaser" rates and some of the more egregious ARM schedules"-Dave
Dave, the first thing I asked when I was getting a mortgage was "does it have a prepayment penalty?" Shouldn't other people be doing the same thing? Should the government be treating people like babies who can't read a contract?
If people make a bad deal they make a bad deal. And they have to suffer the cosequences for it. Unless there is fraud (which is and ought to be illegal) the government should stay out of private contracts.
Incidentally, "egregious" means excellent (or literally outside or ahead of the rest of the flock).
Dave, the first thing I asked when I was getting a mortgage was "does it have a prepayment penalty?" Shouldn't other people be doing the same thing? Should the government be treating people like babies who can't read a contract?
Ideally, no. But we live in a world where electoral issues can, sadly, trump economic reality and even simple justice. Given that, limiting (not even barring) a particularly easy-to-abuse contract term is probably the least amount of coercion that government can be expected to enact in response to a populist crisis. Moreover, this intervention seems like it could go a long way to preventing future crises, which could (and would) be used to justify greater coercions.
Just because one has libertarian sympathies does not mean one has to believe that the best needs to be the enemy of the good.
rwe,
nice catch, that word has been abused far too long..
http://dictionary.reference.com/search?q=egregious
soo long, in fact, the alt. usage has been making it's way into some dictionaries..
http://www.usingenglish.com/resources/wordcheck/Egregious.html
past that, this: "Prepayment penalties are what enable "teaser" rates and some of the more egregious ARM schedules, because without prepayment penalties the borrower would just finance for the teaser period, and then refinance, possibly serially." isn't true, not all loans w/ 'teaser' rates were locked up with pre-pay penalties..
it's this: "With nothing but the fees on the new mortgage, there's not much to stop 'em, after all." that really signifies that he's using the wrong orifice to annunciate his putative point, mortgage transactions are among the most fee-riddled deals one can find..
MEH, in a sense you're right about "egregious." I was first assigned George Orwell's Politics and the English Language in junior high school (or middle school) and have reread it many time since.
And this passage has stuck in my mind:
Egregious used to mean exceptional, until a bunch of semi-literate vulgarians used it improperly. And now it means the opposite of what it used to mean. "Progress" I guess, though not one in a hundred who use the word knows its etymology.
Incidentally, that's not a shot at Dave, who makes a good point above and has made insightful comments before. It's rather a lament for the corruption of language and education.
"I guess, though not one in a hundred who use the word knows its etymology."
I'm betting that 1 in 100 don't know the etymology of any of the words they use (myself included). It seems that the definition has been in use for at least over a decade, so it's not like were making such an egregious error using it. Besides, it's a lot more fun to say than the synonyms.
rwe,
it's interesting that you mention Orwell in conjunction with the new definition of 'egregious'. standing apart from, rising above, the flock is now a "Bad Thing"
baa-tiful, really.
One of the definitions for "egregious" in the Oxford English Dictionary is "remarkable in a bad sense." The earliest cite for this is 1630. It's safe to say that this is not exactly a new use of the word.
Webster's Second New International Dictionary gives "Prominent; eminent; distinguished; remarkable" as a definition, but notes that it is obsolete except in a humorous sense. Webster's Second was published in 1944.
The libertarian in me wants to resist banning any particular type of contract provision. Instead we should just require that the mortgage contract be labeled truthfully.
For mortgages with pre-payment penalties that would require the borrower to agree to a notice in bright red 72-point type on the first page. "The bank is reaming you a new one with no lube," would be a good start.
One of the definitions for "egregious" in the Oxford English Dictionary is "remarkable in a bad sense."-CF
Yes, yes. I know, for heaven's sake. Read my comment above. And read Orwell's essay. Actually it's depressing to see how many of the phrases he attacked (take up the cudgels for, toe the line, ride roughshod over, stand shoulder to shoulder with, play into the hands of, no axe to grind, grist to the mill, fishing in troubled waters, Achilles' heel, swan song) have survived.
Egregious is one of the words he criticized. People use ornate Latin words without knowing the origninal meanings. There's a mixture of pomposity and ignorance there that one can't help but ridicule.
And read MEH's comment too, with the above etmology in mind. You might learn something.
What difference does it make what egregious meant a hundred years ago? It doesn't mean "remarkably good" now, no matter what pedantic fuddy-duddy prescriptivists wish it meant. Egregious has gone from positive to negative. Enormity has gone from negative to positive. Languages change.
According to the etymology dictionary that was linked, egregious was exceptional but said with irony. "arose 16c., originally ironic and is not in the L. word, which etymologically means simply "exceptional.""
So, we are supposed to know that a word spoken in English since the 16th century means something different in a language that nobody speaks?
JordanT,
Cardinal Fang and you ought to be grateful that I taught you something. Words have connotations, not just denotations. If you want to write and speak well, you ought to know the etymologies and secondary meanings of the words you are using.
Egregious meant exceptional. That was, for a long time, the primary meaning. It was also used ironically, to mean something or someone exceptionally bad. Now the ironical meaning predominates, unfortunately, and people who use it are generally unaware of the irony.
"So, we are supposed to know that a word spoken in English since the 16th century means something different..."
If you didn't know, I taught you. Count yourself fortunate. I don't ask payment. I'd just as soon you said "thank you" and went on your way.
But if we ought to know etymology, shouldn't we know the etymology of the common words that we use every day? Of the top of your head, rwe, what's the etymology of if? Of now? Of you? Of that? How can you presume to use those words if you don't know their etymology?
How's your Old English, rwe? Don't you wish we all spoke it, instead of this newfangled Modern English?
Vernon Smith has an interesting op/ed in today's Journal pointing out how previous government interference helped to create the housing bubble. As Smith argues, a tax change in 1997, the GSE's, the mortgage interest deduction and an overly accomodative Fed helped to create the problem.
If he's taking about the tax change I'm thinking of, it had at most a tertiary, if not more likely negligible effect on the current situation. Leaving aside the 10 year time lag (compared to say, the '86 changes, which manifested themselves by contributing to the run-up and brief crash of '87 stock market) the actual rule exempts capital gains only applies to owner occupied residences and then only after 2 years. The fix-and-flippers and other speculators were in and out too fast or in too many places to take advantage of this exemption legally. And the rest, they have demonstrated a basic ignorance that the word adjustable means 'subject to change,' and that income minus expenses should be a positive or at least non-negative number. But they based their decisions on fairly obscure provision of the tax code?
This change does impact the basic economic incentives of an ARM...
It is now possible for people to "kite" mortgages by getting a teaser rate, then shopping around before it expires.
This risk should impose some discipline on lenders.
Sure, the effect is incremental... But subtle changes can have big effects... Just look at all the hoo-ha about quarter point changes at the Fed.
'...the first thing I asked when I was getting a mortgage was "does it have a prepayment penalty?" Shouldn't other people be doing the same thing? Should the government be treating people like babies who can't read a contract?...'
In the case of mortgages, yes. Considering the complexity involved, and the unavoidable disparity of expertise between the two parties, mortgage brokers will always be able to come up with a new scam that will legally defraud home buyers with a good chance of success.
How many homes does someone buy in a lifetime? It doesn't make sense for most people to become experts in this narrow area of contract law, so they delegate the task to their government. The government, recognizing that it would be inefficient to analyze every lending contract, bans certain kinds of contracts that are easily ammenable to taking advantage of less astute citizens. What's wrong with that?
PS-I do recognize that this is not the crux of this problem. It's a good measure, but not a significant one.
"Considering the complexity involved, and the unavoidable disparity of expertise between the two parties, mortgage brokers will always be able to come up with a new scam that will legally defraud home buyers with a good chance of success."-Njorl
I don't understand. You seem to think banks profit from making loans to people who can't repay. On the contrary, banks suffer when their borrowers default. That's precisly why they've tightened their lending standards lately. Some lenders, like Citigroup, Washington Mutual and Countrywide are feeling a lot of pain now that default rates have risen.
It doesn't make sense for most people to become experts in this narrow area of contract law, so they delegate the task to their government.-Njorl, again
The existence of information asymmetries does not, in itself, justify government control. Hayek was ahead of his time when he warned that the standard way of teaching economics was dangerous an misleading. First start with "perfect competition," then note that no actualy market conforms to this model, and finally justify all sorts of government interference on the grounds of "market failure."
The trouble is that this analysis ignores "government failure," which is surely the greater problem these days. Read Vernon Smith's op/ed. He explains how government interference in housing created distortions and moral hazard that contributed mightily to the bubble... Some of us still do believe that moral hazard is a serious concern.
Njorl said: t doesn't make sense for most people to become experts in this narrow area of contract law, so they delegate the task to their government.
Why wouldn't someone get a lawyer to protect their interests instead of hoping that some government flunky will draft a 1200 page set of rules that is airtight?
I don't know about you, but when I'm set to borrow a quarter of a million dollars so I can have a place for me and my family to live, a couple of bucks to someone who has expertise in that area of law seems pretty cheap.
"Why wouldn't someone get a lawyer to protect their interests instead of hoping that some government flunky will draft a 1200 page set of rules that is airtight?
I don't know about you, but when I'm set to borrow a quarter of a million dollars so I can have a place for me and my family to live, a couple of bucks to someone who has expertise in that area of law seems pretty cheap."-Posted by Kevin in MN
Your premise is flawed. The regs are not 1200 pages, they are quite simple. The legal fees are not to protect you from losing $250,000, they are to protect you from losing the penalties for early payoff, which are smaller. The regulation is more efficient than paying legal fees.
If my life depends on being sure my food is healthy, I could hire a toxicologist to test everything I bring home from the store. Everyone could do this. It would be very good for the toxicologist trade. Instead, we impose unfair restrictions on food producers which unfairly depress toxicologist salaries. What a shame.
"It doesn't make sense for most people to become experts in this narrow area of contract law, so they delegate the task to their government."
There are lawyers who do specialize and will be able to read and explain the contract to you. It's not that contracts are all the difficult to read, it's that they take a long time to read and most don't have the time.
Rwe:
You didn't mention it to instruct or teach, you mentioned it in an attempt to make Megan look dumb and yourself look smart.
"I don't understand. You seem to think banks profit from making loans to people who can't repay. "-rwe
No, I think that banks profit most from loans that people can barely afford to repay. That people will generally take those loans only through ignorance. That the banks interest is in offering loans in such a way that magnifies the borrowers ignorance as much as possible. That the occaisional default is an acceptable risk of doing business.
I believe that society as a whole benefits from eliminating ignorance from market transactions as much as possible. Often, but not always, government can act to efficiently eliminate some measure of ignorance in the marketplace. When the people's representitives deem that such a possiblity exists, they are right to act.
Coming soon to a blog near you: a complete cleansing of the English language, such that "rude" means only "simple, lacking in refinement," "vulgar" means "common," "entree" means "appetizer," and "condescension" means simply the admirable quality of willingness to interact with one's social inferiors.
No, I have no substantive comment on mortgage regs.
The strength of the English language is its complete lack of pride. It is the bastard child of a dozen fathers. It will do any job imaginable in any way its master desires.
French is a very proud language. You can always count on it to keep its word over generations. I imagine that with modern recording techniques, our great grandchildren will be able to know what it sounded like back when some people still spoke it.
That people will generally take those loans only through ignorance.
This part I don't agree with. I think the majority out there are people who know what an ARM is but decided to chance it anyway because of rising home prices, "over-optimism", or whatever.
Eliminating ignorance from market transactions is all good and well, but I think there's a lot more irrational (or just plain stupid) financial decision-making out there than actual ignorance.
Njorl: If I don't understand a mortgage, I'll keep renting.
If the mortgage terms are bad, I'll keep renting.
What's so hard about that? (In fact, that's exactly what I did: The best mortgage offer was 10% interest. No. Freakin. Way.)
You don't need to understand contract law. You don't need a lawyer. You just need to be able to say, "If I don't understand it, the answer's no" until someone presents something you do understand. It's this urgency to GET A HOME NOW that puts people in that predicament.
That said, I think modern economic theory places too little emphasis on the impact of "default choices". Simply setting a good default can do a lot of good without infringing on anyone's rights.
So, a better solution might be that you have to fill out a form with a separate organization (could be a government agency, could be a bank, whatever) in order to have a deviation from "good mortgage practices" such as:
-Prepayment penalties
-Teaser rates
-Neg-ams that misleadingly describe the interest rate
-etc
So, if you want a mortgage with one of those things, your broker would tell you, "Okay, to do this, you ALSO have to fill this out and mail it to this other guy and once he responds, then we can go forward". For many people that would increase the hassle enough not to be worth it, and they'd get a good mortgage instead. And at the same time, this wouldn't infringe on the rights of those who do like those options.
Coming soon to a blog near you: a complete cleansing of the English language...
Well, I guess according to some commenters, there is no such thing as a corruption of language. All changes are good, or maybe neutral. Orwell thought otherwise. And so did another writer of some repute:
When people talk about a "sharing society" when what they really mean is a society that uses compulsion to redistribute wealth, there is certain corruption of language and thought involved. Of course sometimes words change their meaning, but sometimes those changes are far from improvements... But this thread is about mortgages, not language...
Also how many people were talked into ARMs by mortgage brokers who said "look, when the value of your house goes up, you can always refinance!"? Given that a lot of this activity was in locations where real estate prices had been zooming up like rockets for years you can see why people fell for this argument. (Probably also have been watching friends and relations brag for years about how much money they had made off appreciation in real estate and now how they were millionaires.)
Yeah, it was a bubble. And it's very hard to keep your head about you when everyone else is losing theirs.
Also, don't be so sure that the banks had any incentive to make sure the mortgages had any value. It was far too easy to take a whole bunch of dodgy debts, combine them together into CDOs and SIVs, have the rating agencies stamp them "AAA", and sell them off to investors. Everyone was playing a game of "pass the hot potato" hoping that when the fit finally hit the shan, it would be in some other sap's hands...
And now they've discovered that the mess has contaminated EVERYTHING they've got.
"You didn't mention it to instruct or teach, you mentioned it in an attempt to make Megan look dumb and yourself look smart."-JT
What? Have you been hitting the sauce Jordan? I never mentioned Megan. Not on this thread anyway. Earlier I, along with some other insightful commenters, had a dustup with her on the efficient market hypothesis. Is that what you're referring to? I was trying to show that she is dogmatic on the issue, not that she is dumb...
***
Now, on another topic, Person makes a good point above. Noone was forced to take out a mortgage he couldn't afford. From what I've read, some of the biggest problems have arisen with Jumbo mortgages. These are not poor people buying trailers or a mobile homes. These are middle class and affluent people taking a risk that the real estate market would keep going up. The Journal recently had an article about a family that bought a 4000 square foot home in Arcadia and took off for Texas when the house's value fell. Should I be taxed to help them stay in a California McMansion? I don't think so.
Good laugh. Thanks, Njorl.
I'm of two minds about this. There are a few people at my work place who use "adverse" when "averse" is proper. I wonder if this will work it's way into conventional usage? What a shame. Our flexibility extends also to grammar. I catch endless crap for editing split infinitives and sentence-ending prepositions. Or perhaps 'that's what I catch crap for'.
Njorl wins the (sub)thread.
Personally, I enjoy entymologies for the sake of the learning and entertainment they provide. However, anybody who huffs about an English word usage that has existed for over three hundred fifty years, in contrast to another usage that whithered at least two or three generations ago, in the context of a colloquial conversational setting(!), needs to have their sense of linguistic pride rebooted with a swift kick in the pants.
"Personally, I enjoy entymologies for the sake of the learning and entertainment they provide."
Maybe I should have let "egregious" pass after all. It certainly wasn't worth all the furor it provoked. I'm pretty sure I'm right that "entymology" is not the word you're looking for, though. But maybe that was a typo, or a joke...
As for Njorl's comment, that is getting so much praise:
Though it has some merit, it isn't entrely correct. Does Njorl really believe that "Valley Girl" English was anything but a retrogression? I'm like, so surprised. It's like, so like, peculiar for him to say so.
I'm still thinking about egregious. I still think people who use the word should know about its ironic meaning. What do the rest of you believe? That willful ignorance is better? Much more important than a single word though is the general subject of language.
And Njor's argument seems to come crashing down by a reducio ad absurdum. The logical conclusion of his argument is that every change is a change for the better, and that Paris Hilton's version of English is at least as good as William Shakespeare's.
But that's enough about this.
"There are a few people at my work place who use 'adverse' when 'averse' is proper. I wonder if this will work it's way into conventional usage? What a shame."-MD
I agree with this and want to add a couple of more complaints of my own. I imagine I'll get attacked as a pedant for this too, but so be it.
1)It bugs me when people use "infer" instead of "imply." Yes, someone will point out that this use of infer goes back a long ways. I know, but the distinction is a valuable one, and ought to be maintained.
2)I also irritates me when people use "anxious" when they really mean "eager." Again, I realize that anxious has often been used this way, but I don't like it. This usage too blurs an important distinction.
I know, I know. I'm pretentious, pedantic, arrogant, etc... Fine.
Incidentally, though, I don't agree with the grammarian's opposition to split infinitives. As I heard someone else argue once, the opening to Star Trek would have lost something if instead of:
It read "boldly to go" or "to go boldly." The whole dramtic rhythm would be lost.
I also reject the rule against ending sentnces with prepositions. Winston Churchill (reportedly) ridiculed that quite effectively:
So there are limits even to my pedantry.
Does Njorl really believe that "Valley Girl" English was anything but a retrogression?
Oh yeah, like so totally!
I think we could have no small amount of fun parsing the entymology of "retrogress" and determine whether your usage here was the most appropriate, but since I understood exactly what you meant, we can probably let it pass.
Or in other words, key phrase: "Understood exactly what you meant". The foundational premise of language is that it must be, first and foremost, a communication medium. If a speaker desires to impart a specific set of meanings to a listener, then what the speaker says must be completely comprehensible to the listener, else it is babble, no matter how sophisticated and artistically constructed it may be.
For a dialect of a language to genuinely be a retrogression, the speaker must necessarily have lost the abiliy to communicate important concepts with persons unfamiliar with that dialect. Otherwise, IMO it is merely a vulgarization (in the now-archaic meaning of the word) but not necessarily a retrogression. The litany of abbreivations that are employed by SMS users are another example of this phenomenon.
I do agree that infinitive-splitting should not be an outright taboo. English is a language where it is actually possible; if the speaker can achieve an artistic emphasis without the infinitive losing sight of its conjugate (e.g. "to boldly go"), then as far as I am concerned, it should be allowed and the constipated prescriptivists can go chew on a bag of nails.
Entymology = study of insects.
Etymology is definitely the word you're going for...er, the word for which you are boldly going.
Also, at the risk of being a prescriptivist (but definitely not constipated), I think good editing forces writers to re-construct split infinitives, sentence-ending prepositions and dangling modifiers. The sentence may still be more effective as is, due to scan properties or some juxtaposition or words, but most of the time these faults reveal hasty and sub-optimal sentence construction.
There are no outright taboos. I wouldn't outlaw poetry. Except in bars.
I thought the optimal sentence is the one that best tells the reader what the writer is trying to say. Sprinkling scads of whiches and unnatural conjugations about based on the concocted rules of 19th century prescriptivists as taught by 20th century schoolmarms is no way to do that.