Bankruptcy

Mortgages at the Dem's Debate

By Adam Levitin

To my surprise, the second thing out of Hilary Clinton's mouth, after "health care," when asked about the differences between her and Barack Obama, was "mortgages." It's about time that the foreclosure crisis is getting prime billing in the presidential race.

At least as Clinton and Obama describe it, their difference seems to be whether or not to freeze mortgage interest rates (for 5 years, as Clinton suggests). I do not believe that a rate freeze is currently in either the House or Senate bankruptcy reform bills, but Obama summed up pretty well how we need to evaluate such a policy option--does it hurt future homebuyers more than it helps current homeowners?

Unfortunately, at least regarding a rate freeze on existing mortgages (as opposed to permitting cramdown), it's not at all clear how it would effect prospective lending because the parties impacted by the rate freeze are often not the ones who originate the loans. Moreover, without knowing what market interest rates would be over the next five years, we really have no way of knowing the ultimate impact. If Bernanke keeps slashing rates, a rate freeze won't have any effect. But even if rates go up, we don't know how much it will impact rates to prospective home buyers or the volume of originations.

One thing we should know by now with the mortgage market is that too complex to determine market impacts based solely on the casual application of economic theory (price theory of demand, etc.). It is not that mortgage markets do not fit with economic theory, but rather that there are a lot of twists in risk allocation within the market that one has to work through in order to predict market impacts with certainty.

There's a debate to be had on the question of a rate freeze. I just hope it happens on the basis of better economics and data than has occurred with the cramdown issue.

Full post as published by Credit Slips on January 31, 2008 (boomark / email).