30y loans
When I've ran the numbers, I've found I preferred a 15y or 10y so I could actually build some equity in the house rather than pay interest seemingly forever without denting the principal. I have a friend for whom I house-sat while he went to India for over a month, who left a stack of signed blank checks for handling his affairs, and his instructions called for making extra principal payments on his home. I think many people prefer not to be saddled with 30y terms.
The point about the "right" interest rate for a 30y period is a good one: who's to say what the "right" rate is? In the last several decades I've teen Treasuries go from low-single-digit rates to double-digit rates well into the teens, and there's no reason to think things can't be as wacky in the next several, particularly as we keep electing politicians to run the country instead of people who own a calculator. The fact that adjustable rate mortgages have been used to create a shock for unwary buyers doesn't mean they're in principal a bad idea. The fundamental problem is that Joe Average has no concept about the time value of money and can't readily work out what is and is not a good deal; Joe Average can only wrap his head around the plausibility of a certain monthly payment. At least, given how I've been approached by car dealers, I assume the "monthly payment" metric is the one that tends to close deals. Me, it's all about time value of money.
Given the relative interest rates, I think having a ginormous 30y mortgage is actually a pretty good idea, but the downside is that the rate is always worse than it is for a 15y.
How to make a set of rules that will protect consumers from wanting to buy more than they can afford could be more problematic than it first appears. The best you can do may be to create rules that make it clear buyers had an adequate opportunity to learn what they were doing when they signed up. Current disclosure requirements are pretty good at that, at least to the extent that make it easy to tell whether required disclosures were or were not delivered. It's a step in the right direction.
Ancient laws against fraud are probably adequate to address conduct like lying to get oversized loans on speculative property purchases, encouraging such lies to get big commissions by making sure prospective buyers know no-one will be doing any fact-checking on any information provided in a loan application, playing games with friendly/bought appraisers to ensure loans go through trouble-free, and reselling known junk as solidly-underwritten loans with adequate security in the event of default. This is why we pay taxes to a government with a white-collar fraud prosecution team. This is why we have prisons. This is why people in the financial services industry need to have a felony-free record (most of the time, anyway).
I'm unclear what new regulatory proposals will actually make life better or more financially efficient. Perhaps, as with federal flood insurance, the problem with the loan guarantee system is that it doesn't involve adequate risk-adjustment, and there is a way to fix things on the back end. However, just as a jury can't be expected to make the right decision when the prosecutors, police, and judge all conspire to hide evidence of the truth, the guarantee folks and CDO packagers can't be expected to fix, somehow, on the back-end, transactions that have been poisoned with fraud at the outset. Perhaps by firewalling within incompetent lenders the loans that don't have adequately documented due diligence, it might be possible to ensure that banks eat their own dog food if they aren't willing to meet standards of prudent loan review. Who knows.
I'm willing to hear proposals, but "you may only loan for X duration or at Y rate" sounds like a prescription for highly-unavailable credit, which probably isn't to anyone's best interest.
Take care,
--Tex.
AI
