[quote briansd1]
* High down payment required.
* Stricter regulations.
* No “ownership society” agenda.
* No mortgage interest deduction.
* Prepayment penalty to discourage endless refinancing.
* Much less subprime.
* Less securitization.
[/quote]
Many of these I agree with, but I do see problems with some.
* High down payment required.
No brainer here. This could also be considered ‘margin of safety’ on a mortgage.
* Stricter regulations.
I would be careful of what is meant by ‘stricter regulations’. See my comments on securitization below.
* No “ownership society” agenda.
Definitely. This only plays to the advantage of existing landowners, particularly those with large blocks of undeveloped land.
* No mortgage interest deduction.
This is a much bigger issue to deal with. The reason why we have mortgage interest deductions, is that previous to the deduction, wealthy people were incorporating the property within a business shell and then could ‘expense’ the interest (oversimplified explanation). If we dis-allow mortgage interest deduction, we also need to look at dis-allowing other forms of interest deduction.
* Prepayment penalty to discourage endless refinancing.
The problem is that this will penalize those who do pay-off the mortgage early w/o refinancing. The better way to handle this would be related to ‘high down payment’ by limiting the LTV ratio to 80% or below (must have 20% equity when financing).
* Much less subprime.
Sub-prime has a place. It also allows people to establish credit. The problem wasn’t limited to sub-prime, and in retrospect, sub-prime was the smaller part of the problem. Where things went wrong with sub-prime, was in the ‘teaser rates’ that had no bearing on what the eventual rate would be. The whole idea of these ‘teaser rates’ was to ‘hook the fish’.. before ‘filleting the fish’… The concept was that the banks would be good because the property would appreciate in the meantime. The bank would end up with the interest payments and use the foreclosure to close out the financing the bank took out to originate the loan… effectively getting interest on money they did not own.
* Less securitization.
Securitization has a part to play. It prevents the domination of the mortgage market by a small group of large players. That said, how securitization is accomplished has to be looked at. Something along the lines of requiring that any organization securitizing mortgages has to hold back 20% of that issue(like the LTV ratios) for 10 years and the holdback has to be capitalized at a minimum of a 50% capitalization ratio(50% of the money they are using to finance the hold back has to be out of their own pocket).
The other thing to look at is CDSs. These are essentially insurance policies, but are not regulated as such. They insure the underlying mortgage and are what took out AIG and Bear Stearns(if memory serves me right) There is no capitalization ratio when you are the ‘underwriting’ party of a CDS, even though if the mortgage goes bad, you are responsible for paying out the difference. Nobody seems to be looking at CDSs as an issue these days.
