Little did I know, until a recent exposure to this concept at certain gala event, that banks really are villainous monstrosities.  I was not aware that banks gave loans.  I was always under the naive assumption that people asked for them.  Silly me.

I was also unaware that banks did not read all pages of the mortgage documentation to whom they were going to lend.  Far be it for me to call this ludicrous, when such pandering of gibberish can permeate the industry.  I was amazed how such a lack of oversight on the bank’s behalf to could lead to this housing crisis. I’m sure that, really, the last 25 pages of a mortgage agreement are  just for the banks benefit.  They seem to know that no one reads it, so it’s full of all kinds of malevolent clauses pertaining to “payment in full” or “adjustable rates” or “Sign here if you’re read all clauses and contingencies included in this contract”.  What kind of nonsensical rationale is this?

Who let these banks reign free?  How could these out of control institutions do such terrible things?  There’s obviously a lack of responsibility in banks these days.

END SCENE

The sad reality is that this is often the way these ideas are disseminated through the populace.  Banks do not search out ill equipped families to reign their legalese down upon them.  Families come to banks because they want to buy something that they don’t have the money to pay for something up front.  Now that we understand the direction of causality, can one really say that this is really all the banks’ faults? That’s like saying you ordered a pizza to be delivered, but in the meantime got mugged.  Is it the delivery guy’s fault for wanting to get paid? I should hope not.

I know I personally have a hard time sitting through reading things at length, ad nauseam.  But truthfully, the bank has the legal obligation to disclose all the details of the mortgage.  This is why I question exactly what kind of oversight we need.  At the time that these mortgages were signed, effectively the bank and the future homeowner had the same access to information.  There isn’t a large problem with asymmetric information.  If we’re looking for regulation, wouldn’t it seem fitting to make it mandatory that the person certify that they read and understood the underlying factors in the contract they’re about to sign?  Wouldn’t this save the banks’ time?

“But Chris,” the dissenter will say, “how can someone know all the information in the mortgage, about the miscellaneous housing laws, and the economic standing of a neighborhood, state or nation?  Isn’t there such a thing as rational ignorance? It’s the job of the bank, I tell you!  It’s their job to tell me everything I need to know.”

Part A, yes, there is such a thing as rational ignorance. We make decisions based on imperfect information every minute.  Because of this though, it’s hardly a reason to defer accountability. There’s a difference between not knowing not being able to know, which moves us to part B.

If for some reason the bank falsified what it had written or had kept you from information you were looking for, there are grounds to blame the banks.  But, there is a reason why you don’t see mortgage agreements written on cocktail napkins.  The banks are regulated.  They have to tell you everything.  They can’t make you read it, and really, why should they have to?  They spend the time to write it, the least you could do is go through it.

“Ok, well that’s all well and good, I understand that we need to read our contractual agreements before we sign them, but my mortgage for $300,000 is now on a house with a market value of $120,000.  Surely this is the bank’s fault!”

It is unfortunate that so many had their home’s value fall by such a large margin.  But, let’s think about the blame.  Implying that the bank, at the time the mortgage was signed, knew that your asset would drop 2/3rds in value, seems a bit of a stretch.  If your home was in fact worth $120,000, do you think you’d get a mortgage for $300,000?  Why would the bank give such a large sum?

What’s to blame is pride.  Nearly everyone felt like the housing market was the gift that kept giving.  No one believed that housing prices would fall.  When investing in any other kind of instrument, take stocks for example, the risk of the price dropping is taken into consideration for the life of the investment, and is compared to the relative return. Then the decision is made to either buy it or leave it alone.  This is how the housing market operates, but in much longer terms.  Because we had seen housing prices go up, people forgot or plain ignored that they could go down. Can this be blamed on banks?

Banks serve a very important function in our society and are the constant targets of regulation.  While one can continually argue the merits or demerits of fractional reserve banking, the institution itself facilities growth.  We should be wary of causality before we point fingers.