Posted by
Andrews on Friday, February 06, 2009 6:54:39 PM
I have realized one good thing is likely to come of this whole financial debacle. Thanks to companies' reluctance to buy mortgages and other loans, lenders may be forced to actually hold government subsidized loans they originate.
It was a complaint I had about student loans, and also about government backed mortgages (VA, FHA, etc.). Lenders would originate loans, collect the "origination fees", and then immediately sell them. It was so bad with my student loans, that I could not tell who owned them by the time I graduated. I actually believed two companies were trying to collect on the same loan at one point. (And they may have been, I had the second removed from my credit report, as they claimed I originated the loan with them directly ten years after I left college, and could not show any documentation of the purchase of the loan.)
Obviously this is perfectly legal, but it is an annoyance for borrowers. People who borrow usually choose a lender based on some criterion. However, if their loans are going to be sold immediately, they might as well simply choose a lender based on spinning a wheel.
Then again, a big part of the problem is the government guarantee. Without government guarantees, loans would still trade, but less rapidly and probably through fewer hands. If you had to trust the originator to do all the background work, and could not be guaranteed any money in the case of default, it is unlikely you will buy a bundled loan which has passed through ten hands. However, once the government promises to indemnify holders against losses, the loans pass from hand to hand rapidly, as you don't care about the originator, nor about creditworthiness, you have Uncle Sam's money backing the loan. And so these loans pass from hand to hand to hand.
So maybe there is one good thing that will come of the subprime collapse. Thanks to the unwillingness to buy loans, maybe lenders will find they have to actually hold the loans they make.
POSTSCRIPT
The problems of government mortgage guarantees should be obvious to all by now. However, I think student loans are equally dangerous. You can read my old argument against student loans in my posts "
The State Versus Universities" and "
When Help Hurts".