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Real Estate Mass Delusion Necessitates Consumer Protection

Two interesting articles for Matrix readers to take a look at…

In the current issue of the New Yorker, there’s a terrific article by James Surowiecki called Caveat Mortgagor [1] who discusses the potential legislation to create a consumer protection agency for financial products comparing it to the birth of the FDA.

Bankers and Wall Street won;t like it because it hampers their ability to be innovative. Of course some innovation got us where we are here today. However, innovation is not bad per se and I’m realistic in that such regulation will not eliminate financial collapse, but rather, I see it as a way to reduce the odds of such a collapse.

I do worry that consumers will develop a false sense of security with investing since many can’t figure out a simple interest rate.

In finance, third parties—like debt-management services and mortgage brokers—are often conflicted at best and corrupt at worst. And buying a house is far more complex, and confusing, than picking out a refrigerator. This doesn’t mean that a consumer-protection agency could have averted the current crisis—given the widespread conviction that house prices would rise forever, disaster was probably inevitable—but it might have saved some from the financial equivalent of Elixir Sulfanilamide.

More important, negative-amortization loans, prepayment-penalty mortgages, and option ARMs all made it easier for people with low incomes and poor credit to buy houses, and for people to buy bigger houses than they otherwise could have. Serious regulation will mean that fewer people can buy homes.

He concludes with “a simple lesson: if you don’t understand the deal you’re making, don’t make it.”

Alyssa Katz, author of “Our Lot: How Real Estate Came to Own Us” is interviewed in Salon.com today in a piece called Who’s to blame for the housing crash? [2]…good intentions and mass delusion that led to the real estate boom.

Here’s the first two questions of the interview:

Isn’t homeownership actually good for you? I thought it was the panacea for almost all social ills, it drove the crime rate down, educational achievement up, and so on.

Yes, well, homeownership is only as good as the amount of home you actually own, and I think the big problem in the last generation or so is that Americans have turned to more and more and more debt to reach for the American dream…

Does this mean that we shouldn’t actively encourage homeownership, using government money or government policy?

I think there’s nothing wrong with using government money, policy, pressure, all those tools to make homeownership more of a possibility than it would otherwise be in the marketplace, simply because the market left to its own devices discriminates aggressively. It rewards people who already have wealth, who have already had a leg up economically, and it’s great to give other people the opportunity as well.

The problem is that homeownership is the only housing policy that this country has ever shown any commitment to. Renters are treated miserably.