Six Fingers of Blame in the Mortgage Mess
The New York Times, September 30th, 2007
SOMETHING went badly wrong in the subprime mortgage market. In fact,
several things did. And now quite a few homeowners, investors and
financial institutions are feeling the pain. So far, harried policy
makers have understandably focused on crisis management, on getting out
of this mess. But soon the nation will turn to recrimination — to good
old-fashioned finger-pointing.
Finger-pointing is often decried both as mean-spirited and as a
distraction from the more important task of finding remedies. I beg to
differ. Until we diagnose what went wrong with subprime, we cannot even
begin to devise policy changes that might protect us from a repeat
performance. So here goes. Because so much went wrong, the fingers on
one hand will not be enough.
The first finger points at
households who borrowed recklessly to buy homes, often saddling
themselves with mortgages that were all too likely to default. They
should have known better. But what can we do to guard against it
happening again?
Not much, I’m afraid. Gullible consumers have
been around since Adam consumed that apple. Greater financial literacy
might help, but I’m dubious about our ability to deliver it
effectively. The Federal Reserve is working on clearer mortgage
disclosures to help borrowers understand what they are getting
themselves into. (“Warning! This mortgage can be dangerous to your
family’s financial health.”) While I applaud the effort, I’m skeptical
that it will work. If you have ever closed on a home, you know that the
disclosure forms you receive are copious and dense. Should we add even
more?
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