I have spent the past two days participating in a conference at Harvard Business School on Consumer Credit (so it became a conference about subprime). Some impressions:
(1) When it comes to mortgages, very few of us are really informed about what we are doing. Of the people in the audience who had an adjustable rate mortgage, no one could say what their payment would be if it rose to the fully indexed amount next year. And the audience was filled with law professors and economists who teach at places like, um, Harvard. This has pretty profound implications about the meaning of consumer choice in the mortgage market.
(2) John Campbell noted that competitive pressures lead lenders to offer products that rely on somebody being stupid (the stupid subsidize the savvy). The 2-28 ARM may be just such a product. While I couldn't imagine myself saying this a year ago, it may be welfare improving to reduce mortgage choice. A menu that contains 30-year fixed mortgages, and fully indexed one, three and five year ARMS may be enough (although I reserve the right to change my mind on this).
(3) Amy Cutts showed (I think) that when lenders can foreclose more rapidly, there is a greater tendency for both cures and mortgages.
(4) Everyone involved in the mortgage process needs to have some capital at stake--including borrowers (i.e., no down payment mortgages just don't make sense).
(5) The housing market may be getting bad enough that some sort of bail-out might not create serious moral hazard problems--that is, many people who did nothing wring are now at risk, and for the sake of the macroeconomy, we need to think about how to help them.
(5) They regulate the mortgage chain far more in the UK and the Continent than in the US. Good news: defaults are much rarer. Bad news, consumers have much less mortgage choice. Borrowers in the UK can't get fixed-rate mortgages; borrowers in Germany can't prepay their loans.
(6) I love visiting Cambridge (I know, HBS is in Alston, but close enough).
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