The Mortgage Reform and Anti-Predatory Lending Act of 2007 has passed out of Chairman Barney Frank’s House Financial Services Committee. It’s now headed to the full House for a vote. In the name of protecting the poor from market predators it will in actuality protect the poor from wealth.
This is yet a new chapter in the grand liberal tradition that advances the illusion that government micromanagement of private lives and markets will make us better off. We already have laws against fraud and theft. But for liberals, government isn’t there to enforce the law. It’s there to run our lives.
The legislation assumes that when private individuals make mistakes they can’t figure out what they did wrong and make adjustments and that even if they could they wouldn’t.
We’re going to wind up with new and onerous regulations in the business of making loans to consumers for purchasing homes, and as a result, fewer loans will be made and we’ll all be worse off. Those who will be penalized the most will be the low-income families who the new regulations will supposedly protect.
Should fraud be permitted in our society? No. Should government interfere with private individuals’ latitude to determine on their own what risks they wish to take and the willingness of others to finance those risks? Absolutely not.
Frank’s bill crosses far over the line into regulating private lives and behavior where he and government have no business.
Why will this hurt the very low-income families it purports to protect?
We already have plenty of experience with the costs of so-called consumer protection laws in general and those designed to regulate mortgage lending in particular.
In a recently published article in the Cato Supreme Court Review, Professor Marcus Cole of the Stanford University Law School discusses the fallout of lending laws in Illinois.
The Illinois Fairness in Lending Act passed in 2005 gives the state oversight authority on loans made in nine designated zip codes in the state. These zip codes are, of course, areas in which residents are mostly lower-income households.
The law places authority in a state bureaucracy to review all applications for mortgages in these designated zip codes. The bureaucrats who review these applications determine if the borrower needs credit counseling and requires the lender to pay for it if required.
The costs of the counseling are estimated to be as high as $700 and can delay the processing of the loan up to a month.
The borrower has no option to forego this counseling, whose objective is “to protect homebuyers from predatory lending in Cook County’s at-risk communities and reduce the incidence of foreclosures.”
What’s the result?
Cole reports the following: “Instead of protecting hardworking would-be homeowners from predatory lending, the new law protected them from credit. Within just a few months more than 30 mortgage lenders refused to lend on homes purchased in the targeted zip codes. Those lenders determined to service these communities saw a rise in their costs, which translated into higher interest rates on their loans.”
The purported cure was worse than the disease. Cole goes on to note that, “home sales in the designated zip codes dropped an average of 45 percent in just one month after the bill took effect. Home prices plummeted, draining relatively poor but hardworking people of what little equity they had in their homes.”
The experience is similar in other states where governments have authorized bureaucrats to insert themselves between lenders and borrowers. Yes, the number of defaults have declined. They have declined because the number of loans have declined.
The Wall Street Journal reports that currently “80 percent of subprime loans are being repaid on time and another 10 percent are only 30 days behind.”
These are overwhelmingly loans to low-income families. Probably, under Barney Frank’s new regulatory regime, many of these loans would not have been made and the families in these homes would be renting and considerably less wealthy than they are today.
To quote former Texas Rep. Dick Armey, “freedom works.” But it can only work if we let it.
Many have paid and are paying a great price for the errors and excesses of recent years. We now should allow private individuals and private markets the opportunity to self correct, which is what will happen.
If government steps in to pre-empt the market and Barney Frank is the one to decide who gets loans, the rich will stay rich, the poor will stay poor, and we’ll have one more reason for already skeptical Americans to question the American dream.
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