More Mortgage Madness

It’s been noted that one of the reasons the mortgage industry decided to play along with Bush’s "voluntary" rate-freeze plan for mortgages is that they hoped to shield themselves from further regulation. That may be true in the short term, but that doesn’t mean that liberal legislators aren’t still going to come after the industry. As an old boss used to say: "You can’t get rid of the crocodile by feeding him your leg." There’s no appeasing these people. And, like clockwork, here come Sens. Barney Frank and Christopher Dodd with a new set of regulations for the mortgage industry:

Mr. Dodd’s proposal would bar specific practices in subprime lending like prepayment penalties, which borrowers have to pay if they try to refinance or pay off their loans early within a few years, and yield spread premiums, which are commissions lenders pay to brokers for persuading borrowers to take out a higher-cost loan than they could qualify for.

Now, I can imagine a lot of people not objecting to any of this. But let me make two observations.

1) Does the consumer always have an absolute right to the best deal? I think the answer is obviously not. In cars and computers and diamonds and fur coats, buyers and sellers work out deals that are mutually beneficial. If someone pays a particular price for something, it’s (obviously) because they’re, well, willing to pay it. Sometimes that means the seller gets higher margins. Sometimes now. Now, in a healthy, competitive industry not burdened with excessive regulation, those prices will eventually fall and reach a natural equilibrium. But the way to get there isn’t by mandating selling practices.

2) The proposal represents a pretty severe attack on freedom of contract. It would ban agreements made between employers and employees — presumably some which are already in place — and it would ban particular types of agreements between buyers and sellers. Why shouldn’t a buyer be allowed to agree to a specific payment plan and then face penalties for altering it? Mortgage banks count on scheduled payments and the income (and, yes, interest) they provide in order to make their money. If a buyer agrees to lock into a payment schedule, why should the bank have to readjust to let them?

None of this is to argue that every single mortgage transaction in the U.S. over the last decade or so has been perfectly kosher. But this sort of regulation of the industry is unwarranted, and potentially quite damaging.