Zywicki in WSJ: Treat Borrowers Like Adults

In a Wall Street Journal op-ed critical of administration proposals to create a consumer financial product safety commission, Professor Todd Zywicki warns that treating consumers like victims can lead to counterproductive regulation that increases cost of and decreases accessibility to loans, causing more harm than good.

The premise of the administration's proposal, says Zywicki, is that the current financial crisis was created by the actions of predatory lenders.

"Treating all consumers as hapless victims rather than recognizing that many consumers rationally respond to incentives is a recipe for unintended consequences," he says, adding, "Our current problems are caused by misaligned incentives and the rational response of consumers and lenders to those incentives."

Instead, Zywicki believes Washington should revise the disclosures it requires for mortgages, tax and other incentives that encourage overinvestment in housing markets, and incentives for homeowners to walk away from home loans.

Let's Treat Borrowers Like Adults, The Wall Street Journal, July 8, 2009. By Todd J. Zywicki.

"The idea of a financial product safety commission comes from Elizabeth Warren, a Harvard Law professor and the chairwoman of Congress's oversight panel for the Troubled Asset Relief Program. She says that such a commission is necessary because consumers cannot buy a toaster that has a one-in-five chance of exploding, but they can get a subprime mortgage that has a one-in-five chance of ending in foreclosure.

"But this simple-minded analogy misses the point. An unsafe toaster is a hazard to anyone who buys it. That's not true for loans.

"Virtually every credit product is valuable to some consumers. Low-documentation loans are a boon for homeowners with a lot of equity who want to refinance their mortgages (even as they are a dangerous thing to offer speculators).

"And unlike toasters, borrowers have substantial say over whether their loan 'explodes.' Foreclosures have risen throughout the country, but an epidemic exists only in a handful of areas -- Las Vegas, Phoenix, Miami and the Inland Empire region of California are all places where foreclosure rates are five to 10 times higher than the national average. These areas saw price bubbles that have now popped, giving many homeowners who owe more than their house is worth strong incentives to walk away from their loans."


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