Unintended consequences of relaxing lending standards…

If you’re trying to figure out why we’re in the financial mess we are in, I highly recommend reading the report linked below. From what I can gather, its a systemic failure, and one cause came from relaxing lending standards. While it helped many people who couldn’t afford a home afford one, a lot of them, obviously couldn’t keep their homes once their adjustable rate mortgages readjusted. I think a lot of people had an interest in a few metrics focused on measuring home ownership and didn’t consider other potential effects of their policies, namely the influx of speculators and flippers who took advantage of said standards.

The weakening of mortgage-lending standards did succeed in increasing home ownership (discussed in more detail later). As home ownership rates increased there was self-congratulation all around. The community of regulators, academic specialists, and housing activists all reveled in the increase in home ownership and the increase in wealth brought about by home ownership. The decline in mortgage underwriting standards was universally praised as an “innovation” in mortgage lending.

Read it here: Anatomy of a Train Wreck: Policy Reports: The Independent Institute

The recent rise in foreclosures is not related empirically to the distinction between subprime and prime loans since both sustained the same percentage increase of foreclosures and at the same time. Nor is it consistent with the “nasty subprime lender” hypothesis currently considered to be the cause of the mortgage meltdown. Instead, the important factor is the distinction between adjustable-rate and fixed-rate mortgages. This evidence is consistent with speculators turning and running when housing prices stopped rising.