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Lending Law Reforms



November 14, 2009 – Comments (2)

Big Picture has a post with a piece from a report titled “What Causes Bubbles and Crashes, and What Can We Do to Prevent Them?”.

I spent a lot of time doing my six degrees of leverage write-up series, which I put into a single write-up on my Making Sense of My World blog.

You read this stuff and they keep coming back to that low interest rates cause the leverage.  The problem simply isn't the low interest rates, but the stupid lending laws that have been written without any kind of sense of numeracy.

You can have low interest rates, but the amount you can borrow should not be based solely on the interest rate.  My post "Sensible Lending Laws" explains why qualification for a mortgage should be on a fixed standard with a bit of wriggling for when rates are below the qualifying standard, which would allow borrowers to borrow more, but not an insane amount of extra borrowing.

It seems to me that interest rates have been reduced under a pretense that it helps the economy.  What helps the economy about lowering interest rates is that people with higher rated debt can refinance and increase their disposable income, and that is what helps the economy.

What happens to people who do not have mortgage debt is that asset prices are inflated.  When they go to buy a home they end up with enormous debt relative to income and dependence on low rates and complete lack of empowerment to get out of debt.  I have examples in my Six Degrees of Leverage where I show the difference of increasing payments by 10% with various interest rates.  When rates are higher it enormously reduces the debt burden.  With low rates your extra payment is like a gnat trying to push an elephant.  Getting out of debt is reasonably hopeless.

Greenspan walked us down in the interest rate over a period of about 20 years and each younger cohort of new home owners has a more challenging debt load because of it.  The other thing is that refinancing at a lower rate does less and less, so the benefit to the guy that got in at 5% and refinanced at 4% does far less in helping get out of debt then going from 8% to 7%.

I suppose the other thing that is happened is quite a few never learned to manage money and live within their means.  If you were able to refinance a few times over a 10 year period at a lower rate you are a lot of your increase in disposible income coming from refinancing rather then from wages.  That opens a whole can of worms as to why wages relative to costs have declined so much and so little has been said about it.  The household that got into the housing market when rates were higher had enormous wealth and income protection.  The stupid lending laws made their homes appreciate to nonsense levels, and instead of disposible income coming from mostly wage, like it did before Greenspan, refinancing has been an enormous source of increasing disposible income.  So, lifestyle protection from refinancing means a much higher degree of apathy about declining wages relative to costs, and it is the youngest generation that has paid for this incompetance.

And what joke, this generation that has been so grossly compromised in their ability to provide for themselves is expected to provide for an aging population.

2 Comments – Post Your Own

#1) On November 14, 2009 at 11:57 AM, dwot (29.18) wrote:

Off topic, some of these H1N1 flu stories sadden me so much...

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#2) On November 14, 2009 at 2:58 PM, starbucks4ever (92.54) wrote:

Sensible lending laws should ban any lending for an item whose production costs are not so high that it can't be bought for cash. Houses can be produced for $50K or so, hence mortgages should be illegal and any laws which allow lenders to offer mortgages even to "qualified" home buyers can't be called "sensible". 

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