I wasn’t too surprised yesterday to hear the chief economist of the Mortgage Bankers Association say—in reference to the subprime meltdown—that “the market is working.”
There is a school of economics that says markets always work, just as Voltaire’s Candide once said that all is for the best in this, the best of all possible worlds. When credit standards got unbelievably lax, true-believer economists averred that markets were working: After all, bankers were freely choosing to make the loans, and investors were freely choosing to buy them.
And now that subprime lenders are shutting their doors, shareholders are getting burned, and borrowers face foreclosure because they can’t refinance loans they shouldn’t have received in the first place, the word once again is that the market is working.
Here's an excerpt from yesterday's statement from the Mortgage Bankers Association:
"The market is working, culling over-capacity from the industry, as price signals from the capital markets lead to changes in product mix from originators, and directly and immediately impact the rates that mortgage lenders can offer to borrowers. Far from being a problem, these clear and effective market signals and actions will help the market to more efficiently regain its equilibrium."
"We would continue to caution policymakers to avoid any regulatory or legislative actions that would impede the ability of the market to respond to changes in underlying economic conditions. An important role of public policy should be to facilitate efficient markets, as these will ultimately benefit consumers."
One question: What would markets look like if they weren't working?
Before listening to the Mortgage Bankers' conference call yesterday, I spoke with John Taylor, president and CEO of the National Community Reinvestment Coalition. To put it mildly, he isn't in the Candide camp. He prefaced his remarks by saying that the only reason economists exist is to make astrologers look good.
"The Mortgage Bankers' idea that the market corrects … accepts the assumption that millions of people will be displaced from their homes. Congress has a higher standard. It’s not acceptable to have the market prevail and make corrections when the cost of that is literally millions of families losing their homes."
Warming to his topic ...
"Families moved out by the sheriff, leaving their keys behind, and having to look for places to live: Do people believe this is the way it should work, 'as long as the market prevails'? People ought to be able to walk into a broker’s office and know they’re going to get offered a competitive product that meets their needs."
Now, it's true that some of the consumer advocacy groups would go too far in regulating lending. Lots of people are living happily in their own homes, and establishing solid middle-class lifestyles, because the markets were free to extend credit to families that might not have gotten it before.
So I have some sympathy for the Mortgage Bankers' warnings against too much meddling from lawmakers and regulators. But a relentless insistence that "the market is working"--always--doesn't do the bankers' cause any good.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.