Saturday, March 22, 2008

Pass the Spittoon, Mortgage Meltdown Edition

I confess: I get annoyed beyond measure when I read articles like this one from Alan Zibel and J.W. Elphinstone of the Associated Press, which ran in my local paper this week. It manufactures drama where none is warranted. Here's the hook:

Just when consumers and the U.S. economy need banks to lend more freely, the mortgage industry is making it harder to borrow — even for those with good credit.

Mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation's ZIP codes where they refuse to insure some home loans.

I'm already annoyed in three ways, and it's just two sentences in:
  1. Consumers and the U.S. economy do NOT need banks to lend more freely. Banks lending too freely is what got us into the current mess.
  2. The traditional 20 percent down payment for a home exists in part because mortgages are nonrecourse loans--the property is the only security the lender has in the transaction. While some reductions of that number may be appropriate, it was the abandonment of sensible lending standards that got us into the current mess.
  3. The word "some" in the last sentence smuggles in quite a lot. If the meaning of "some" were made plain early in the article, we would stop reading and disregard the article as not worth our time.

We do find out what "some" means later on in the article:

In recent weeks, mortgage insurers have flagged more than 9,600 ZIP codes in at least 34 states where they won't insure certain types of home loans — those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making down payments of less than 3 percent.

"Some" home loans are now revealed to be loans that are extremely risky--loans whose pervasive use are what got us into the current mess--in areas where house prices are declining the most. So a shorter version of the article is that mortgage insurers are now not willing to insure loans that they shouldn't have been insuring earlier. That this is a good thing has completely escaped the notice of the two authors.


Anonymous said...

My husband read that to me this morning, and he had the same reaction as you.

Any job openings for economics profs at Dartmouth?

Marcus said...

I just refinanced my house from 6.5% fixed to 5.125% 15 year fixed.

Seems to me banks are still lending.

Dr. T said...

Why would anyone expect reporters to write an unbiased and factually correct article about economics? They couldn't do so if their lives depended on it.

An addendum to Marcus's comment: Not only are banks lending, they are heavily advertising loans and mortgages. said...

When the banks lend freely it affects the person who really as good credit. Some measures has to be taken to come out of this financial crisis

locksmith mesa said...

That's really true!

refinance mortgage said...

Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness.