David Leonhardt comes out strongly in the middle on current trends in mortgage financing. He rightly notes the benefits of increased access to credit, but he does exaggerate the case somewhat. The column points to the fact that mortgage fees have fallen by 80 percent as a share of mortgage values over the last two decades. This is misleading for two reasons. First, the fees have fallen in part because of the runup in house prices. A $2,000 fee is 1 percent of the purchase price of a $200,000 house, but only 0.5 percent of the purchase price of a $400,000 house. With the real price of houses rising by more than 50 percent since 1995, we should expect to see a substantial decline in the ratio of fees to mortgage values. The second reason for the decline is a change in the mix of mortgage products. Twenty years ago, the overwhelming majority of mortgages were 30-year fixed rate mortgages. The vast majority of current mortgages are much shorter term and/or adjustable rate. These are very different products. Often borrowers take out an adjustable rate with the intention of switching to a fixed rate in 2-3 years. This would cause the borrower to incurr additional fees. Of course, the widespread availability of adjustable rate mortgages does give borrowers more flexibility than they had previously, and for people who only stay in their house 2-3 years (unfortunately this is common) they can provide real savings. But it is misleading to compare the cost of short-term mortgage loans and ARMs with the cost of a 30-year fixed rate mortgage. These are different products. Easier access is mortgage credit is definitely a positive development, but the people who sought to mislead lenders to push their loans (and there were many) deserve to be hung. I am not in the school that thinks low income people are dumb and can get easily suckered, but I do think that someone who devotes their marketing expertise to pushing a complex financial product to typical consumers will often be able to succeed. After all, most people don't analyze mortgage products for a living. Higher income and more educated people can be every bit as gullible in this regard as low income people (how many bought tech stocks in 1998-2000), but it is of less consequence for them when they take a hit.
--Dean Baker
