The David Laibson plan for ending mortgage teaser-rate insanity

Nice. I still believe in fixed interest loans, though. I wish LowerMyBills.com would just crash and burn already.

Strictly speaking, the problem is not ARMs. The problem is the plunging values of houses and the fact that refinancing is all but impossible. In other words, a credit and solvency crunch.

The massive pre-payment penalty was my primary objection to the way that the subprime industry was operating -- so this sounds like a good start to me.....

But in addition, I do think that something has to be done about the ratings services (Moodys, etc.) that rated these CDOs as AAA despite the fact that they were backed up by subprime mortgages. I don't care how you slice and dice these loans -- the fact remains that they don't represent AAA bonds, because AAA should mean virtually no risk -- and lower returns. This paper was not "no risk", and the ratings services knew it....

Won't work - look at the US credit card market where 0% teasers have steadily increased from 6 months to 12 to 18 months although cardholders can easily transfer these balances when the teasers expire ! Most consumers do not rationally evaluate financial decisions which is what makes these products profitable

Hey, I use those 0% credit card teasers all the time. What's wrong with that?

"Hey, I use those 0% credit card teasers all the time. What's wrong with that?"

Absolutely nothing. IF you know how to handle money, you will not fall prey to the vices of these products. But most people are weak-minded, emotional, undisciplined spenders. Only people with good credit scores should get loans with low interest rates.

The only reason that there is a housing crisis is because people with standard and sub-standard credit scores got loans. The lenders only lent out the money to collect the intial fees. The loans were then sold to others as "secure" investments. It was all a pyramid scheme.

How about: just require that the term "interest rate" be used properly. Take the total amount of the debt that you have to pay to eliminate the loan at any given time, rolling all loan costs into it. The rate at which that increases in the absence of payment is "the interest rate", AND NOTHING ELSE can be called that! If you pay 4.3% "interest", which happens to correspond to an additional 10% on the "back end", you're not really paying 4.3%, and the lender should not be able to characterize it as that!

I think Person has it right. It would be good to require the use of that definition of interest against any payable. No more interest masquerading or disguised as "special fees".

But a mortgage which is foreclosed upon after only a few years of payment when the payments shoot up is very unlikely to be profitable for the holder of the loan.

The thing is that the lenders have been able to sell on the mortgages so that someone else owns them when the rates shoot up and they are defaulted upon.

It seems to me that what is needed are mechanisms to prevent the purchasing of mortgage loans by sucker investors (requiring loan issuers to hold the loans, improved ratings, etc) rather than mechanisms to make bad loans a little more unprofitable for the ultimate owner of the loan.

I don't know if making all mortgages more freely callable is a good or bad idea, but I don't think it would have done much to avoid the current crisis. It might have slowed it down a bit and let it keep going a bit longer by allowing some people to stay on the refinancing treadmill a longer.

It takes a special kind of arrogant, "central planner wannabe" mentality to insist that restricting the ability of competent consenting adults to enter into strictly private contracts with one another actually makes them better off.

All mortgages are evil. Tell every teenager you know to save every penny they earn, live with their parents until they are 30, then just buy a house with cash. Imagine if you did that? You would most likely not be reading this article.

[...] Well, here’s Justin Fox and Harvard Behavioral Economist David Laibson’s presenting the Curious Capitalist World Exclusive Plan For Helping Consumers by Banning Prepayment Penalties At The Federal Level (from August 2007 !!!): Now Harvard economist [...]