Yes, the bank extending the mortgage certainly has an incentive to only make loans to creditworthy people, and they're the experts on lending. But the homeowner has a lot more incentive to avoid defaulting, and has special insight into their own financial lives that no bank could ever have. Like any market, its smooth functioning depends on both buyers and sellers having at least half a clue each.
Mortgage giant rescue is even more complicated, because the mortgage giants in question aren't actually the banks that make mortgage loans, they're the pseudo-federal entities that buy mortgages from lenders, package them into securities, and sell them to investors.
That isn't to say that their problems weren't caused by colossal incompetence, because they were. It's just that the incompetence in question wasn't in making bad credit decisions, but in their financial engineering. And the question of bailing them out hinges not just on moral hazard vs. sector stability, but on their weird hybrid quasi-governmental nature.
(But in the end, yes, the whack-a-mole game is a constant feature of financial regulation, and it's why getting people's incentives properly aligned is often superior to more regulation.)
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winterfish
Re: 5. Fighting Foreclosure
Date: 2008-09-15 02:40 am (UTC)Mortgage giant rescue is even more complicated, because the mortgage giants in question aren't actually the banks that make mortgage loans, they're the pseudo-federal entities that buy mortgages from lenders, package them into securities, and sell them to investors.
That isn't to say that their problems weren't caused by colossal incompetence, because they were. It's just that the incompetence in question wasn't in making bad credit decisions, but in their financial engineering. And the question of bailing them out hinges not just on moral hazard vs. sector stability, but on their weird hybrid quasi-governmental nature.
(But in the end, yes, the whack-a-mole game is a constant feature of financial regulation, and it's why getting people's incentives properly aligned is often superior to more regulation.)