As unemployment figures improve, investment banks are back to profiting, bailout funds have been repaid at a surplus, and the US economy begins to glimpse a turnaround, there remains a particularly scary issue that still jeopardizes the US economy on a fundamental level: the mortgage crisis, which had a prominent hand in effecting this deep recession, remains unresolved. For this reason, the brilliant Elizabeth Warren, Leo Gottlieb professor of Law at Harvard Law School and chair of the Congressional Oversight Panel for TARP, has warned and continues to warn that we need to improve (or, rather, establish) consumer protections to help stabilize the housing market. For warren, the mortgage issue is the most pressing issue on the table right now.
Part of the problem is that, even taking the real estate industry's figures, about 25 percent, or over 11 million US mortgages, as of late February are in negative equity. Translation: for these "underwater" mortgages, consumers owe more in debt on their homes than the actual market value of their homes.
Now consider this, particularly if you are a "free-market" conservative: if the all-powerful and self-correcting free market is based on rational consumer choice as well as the rational commercial pursuit of profit, the combination of which ought to provide consumers with the best types of products they seek, businesses with incentivizing profits, and broader society with the greatest possible amounts of wealth and innovation (however one measures these), then what is the best, most rational choice for consumers whose mortgage debt balances are higher than the values of their homes?
The answer is pretty simple: we wouldn't expect a business to continue to invest capital in a division that looses money year after year; we wouldn't expect a real estate firm to retain "sinking" property on which it makes a continual loss; so of course we shouldn't expect a consumer to keep making monthly mortgage payments to a lender on a debt balance that's worth more than the house itself. To do so would simply be irrational, against the very principles upon which capitalist systems fundamentally rest. A business isn't a charity; but neither is a consumer. And a smart consumer in a negative equity situation has plenty of incentive to simply default on the mortgage, walk away from the home, leave the lender with the debt, save his or her money, and go in with another completely desperate lender on a cheaper home. With so many middle-class American "homeowners" in similar situations and so many lenders in self-created shambles, credit standards will fall (have fallen) and consumers can viably move on from negative equity situations if they have the gall.
What does this tell us?
1) The free-market justification for producing sketchy loan products and financial vehicles is also a justification for underwater consumers to walk away from their debt, ultimately threatening the full-scale collapse of the entire loan industry. Yet the hypocrite free-market conservatives and conservative-supported real estate lobbies have continued to tell constituents to keep paying on their mortgages (to suck it up because it's their fault for making such poor financial decisions in the first place), however irrationally, while using arguments for free-markets and industry deregulation to support the industry in preying on un- or under-informed consumers in the first place. You can't have it both ways, folks.
2) As someone who worked as a government contractor for Housing and Urban Development in the past, specifically on the HUD-1 and Good Faith Estimate mortgage forms, more specifically to fight the real estate lobby and design more user-friendly forms that make it easier for consumers to understand their loan terms and harder for "innovative" lenders to intentionally complicate the forms in order to sneak crucial information past un- or under-informed consumers, PMB can tell you that certain kinds of financial "innovations" are poison. Not only does the brute incentive for profit maximization provide incentive to "innovate" financial vehicles that harm consumers; it also harms the very lending industries that created faulty loan products in the first place, as consumers have been defaulting on their mortgages left and right.
Following from Elizabeth Warren's recommendations, the only way out of this mess of self-contradictory, "free-market" illogic is proper consumer protection and financial and lending industry regulation. One would have to be a fool not to support basic regulations that not only save consumers from poison products, but, perhaps more importantly, save industry producers from themselves and their own shortsightend, unbounded avarice.
