Dollars and Jens
Tuesday, April 24, 2007
subprime bailouts
Apparently a number of states are getting into the mortgage business, providing generous refinancing terms for borrowers with high interest rates, but insisting they don't intend to lose money. Well, their borrowing costs are likely lower than that of private mortgage lenders, and it's possible they've found actual market failure in which good credit risks get mixed in with bad ones,
Maryland also requires that the home be a primary residence and that the loan not exceed 85 percent of the value of the property.
but it's also more than possible they're improperly more optimistic about how the market is going to develop in the near future, or that they're simply cherry-picking the mortgages that have turned out to be profitable instead of those that haven't:
In addition, their old lenders may have insisted on enforcing the onerous terms of their original agreements, such as prepayment penalties. The state has more leverage with lenders to compel them to co-operate with the program.
"Co-operate" = "give up the contract terms that allow them to profit on some of the loans to make up for the loans on which they lose money". Heads I win, tails you lose. This may inspire lenders to be less eager to make such loans in the first place; of course, at this point, that's the direction the political pendulum has swung, anyway:
To avoid future crises, Maryland is also trying to discourage irresponsible or unscrupulous lending, according to Thomas Perez, secretary for the Maryland Department of Labor, Licensing and Regulation.
In five years, no doubt, they'll be back to complaining about "underserved communities", probably with the traditional lack of creativity in coming up with theories as to why such communities are underserved.

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