Mortgage morass.(Economics And Regulation)

Michael Greve, "Subprime but not Half Bad," AEI Federalist Outlook, October 2003 (aei.org)

For an American with a steady job and decent credit history, it's not that hard to obtain a low-rate mortgage and purchase a house. People with spotty employment or checkered credit histories, however, typically get money to buy houses in the subprime market. Here they pay higher interest rates, and sometimes fall victim to confusing, and even fraudulent, terms and penalties.

In the last five years, a coalition of non-profit organizations led by the AARP has begun lobbying legislatures to limit the subprime mortgage market on the basis that it often victimizes minorities. While subprime mortgages allow many people to become homeowners, they are, AEI's Michael Greve concedes, often marred by bizarre rules. These flaws have allowed lobbyists to gain enough traction to pass laws aiming to reign in subprime lenders in a half-dozen states. Some of these laws, such as one passed in Louisiana, outlaw certain practices but allow damaged parties to sue only the local mortgage brokers who made the loan. Other states, such as Georgia, have experimented with regimes that allow consumers to sue anyone who even touched the loan, including the deep-pocket banks that often originate them. This merely resulted in a mass exodus of mortgage lenders from the state.

Congress is now considering two approaches to subprime regulation. One approach, supported by Democrats like ...