RALEIGH – Free societies are built on mutually advantageous contracts. On the deals we make with each other, in other words. Coercive societies – be they social democracies, socialist, fascist, or theocracies – have as their common denominator the notion that government need not respect such deals, that government officials should substitute their preferences or judgment for those of the contracting parties.
I know that’s not the way differences in social and political organization are often framed by politicians, activists, and the media. That’s because they don’t like the resulting picture. So they lapse into Orwellian doublespeak and attempt to redefine words such as “freedom,” “consent,” and “government.” But ignorance is not strength, and compulsion is not freedom.
Nor is it “predatory lending” when applicants overstate their incomes, understate their liabilities, and misrepresent their assets when applying for mortgage loans. A more-apt term would be “predatory borrowing.” When these borrowers prove incapable of paying back their loans, homes that they couldn’t have purchased without fraud in the first place are now repossessed, at great expense, by lenders who aren’t getting paid. Yes, there have been shady characters in the mortgage business who initiated loans that borrowers couldn’t really afford, and then sold them for a gain to unsuspecting banks or investors. In that case, however, the main victims of their fraud were the financiers, not the borrowers. (Another cause of the problem, easy money from the Fed, is discussed here.)
I certainly believe that the state has a key role to play in preventing and policing fraud. In my view, this role properly extends beyond recourse to the courts to resolve contract disputes to include disclosure requirements for such complex transactions as home and insurance purchases. But those who would respond to current problems in the subprime mortgage market with new federal or state regulations aren’t primarily interested in ensuring informed lending and borrowing at rates set by free markets. They want to impose price controls and other regulations on the contracting parties.
No one should be under any illusions about the likely result of such “consumer-protection” legislation: it serves the interests of some financial institutions over others, not really the interests of consumers, who typically bear much or all of the costs.
In mortgage lending, for example, three states – Illinois, Georgia, and North Carolina – were pioneers in the imposition of strict state regulations. As Marcus Cole, professor of law at Stanford University, concluded in a recent paper (caution, PDF), lower-income households in all three states bore the cost of these regulations in the form of lower access to credit. Several studies of North Carolina’s so-called predatory lending laws, for example, found significant reductions in the number of mortgages secured by lower-income borrowers.
Of course, if you thought that too many high-risk loans were being approved before the advent of the regulations, you wouldn’t be surprised at a drop in loan originations. However, the point is that while some of the loans eliminated by the regulations would likely have gone into default later on, most would not. Even now, most subprime-mortgage borrowers are making their payments. What draconian lending laws do is punish all borrowers whose incomes, assets, and credit histories preclude them from traditional mortgage markets. Some predators – be they borrowers, mortgage brokers, or both in collusion – are blocked out, sure. But so are many other borrowers and financial institutions who would like to make a mutually advantageous deal but can’t afford to pay the government-imposed toll.
Rather than limit themselves to combating truly fraudulent behavior, the regulators and activists cheering them on decided to sacrifice the interests of lower-income homebuyers in order to rein in the abuses of a few. Perhaps that’s the “deal“ they wanted to impose on the rest of North Carolina, but in my mind it’s not a deal unless you have the right to say no. It’s a command.
Hood is president of the John Locke Foundation.