OPINION: The silver lining on the sub-prime mortgage

Michael Hicks, Ph.D., director Bureau of Business Research, Ball State University

Thanksgiving is my favorite holiday.  Maybe it is because no one wants me to help cook, or perhaps it's due to the stream of college football.  My fondness for the holiday might even be for the rituals the Army held on the day (officers served wine to soldiers at the mess hall), or even the fact that I enjoy routinely shocking my family with my gastronomical excesses.  Mostly I think I like it because it is such an unhurried, unquestionably fun, shared day.  

Many of us gathered over Thanksgiving at family homes that hold treasured memories or the prospect of an optimistic future.  We gave thanks for the many gifts life brings in much abundance to those of us in this nation.  What many of us didn't conscientiously dwell on is how important the simple act of home ownership may be.   

There has been much media attention to the sub-prime market for real estate over the past many months.  Virtually no news cycle is without analysis and commentary about the woes of financial markets, financial institutions and prospective commercial borrowers.  There are also no shortages of stories about home foreclosures.  The saddest of all these stories are about families trying to keep their homes as adjustable rate mortgages rise.    

It is impossible not to be worried about these events in the aggregate and in the particular.  But what worries me most about the sub-prime mess is the potential unforeseen consequences of policies aimed at preventing another sub-prime mess.  Here's why.

There has been a little thoughtful research on the role home ownership plays on poverty.  A consensus - if such a thing happens in economics - is that home ownership provides a solid source of wealth creation, a buffer to income variability and a source of equity that can be drawn upon to finance investments in business, a college education, or to pay for unexpected expenditures.  In short, home ownership is an important step up the rungs to prosperity.    

Most of the sub-prime loans did not go to those in borderline poverty, but instead went to far more affluent families trying to build equity in a home.  The overwhelming majority - upwards of 9 out of 10 - of these homeowners continue to pay their mortgage, and enjoy their homes.  

A subset of sub-prime borrowers unwisely purchased adjustable rate mortgages.  These have inched up quickly, and a minority are in danger of (or already have) lost their homes.  The good news is that real growth in foreclosures is far lower than the usual snapshot of data suggests (the change in bankruptcy laws made 2006, the benchmark for most of our reports, an usually low year for foreclosures).  

Knowing that financial markets work, and that banks are profit maximizers also makes me sanguine about the sub-prime mess.  Foreclosures are very unprofitable for lenders, so that given some time to respond, most will permit significant renegotiation with borrowers.  

However, my biggest worry is that policy makers (primarily Congress) will over respond to the mistakes made by borrowers and lenders.  I think thoughtful policies (like easing the way for mortgage re-financing) would be helpful.  But I fear the spread of unintended consequences of punishing lenders.  Markets are already punishing the miscreants - as well they should.  I just hope Congress, and state legislatures don't rush to place more barriers on home ownership, with the inevitable effect of denying more families home ownership opportunities.    

It is a modest, but meaningful wish for this season of Thanksgiving.