Carping on credit

The Wall Street Journal reports that Illinois is experimenting with mandatory credit counseling for people considering non-traditional loans:

Yet Illinois's experience to date shows how difficult it is to create even modest safeguards in the home-buying process. A previous pilot program similar to the new law was viciously attacked and rescinded in January, after only a few months. Instead of winning plaudits, the pilot program quickly became mired in charges that it would make it harder for minorities to buy homes. Mortgage brokers, fearing a loss of business, claimed that access to credit would tighten in the neighborhoods targeted by the law. Rumors flew that dozens of lenders had pulled out of the area.

The general response of economists is to dismiss this claim with a derisive laugh. If mortgage brokers find it harder to sell their wares when borrowers better understand the terms, then those are mortgages that shouldn't be sold.

But it isn't quite that simple. Much depends on the quality of the information given, which is why pro-choice activists often object to counseling requirements, and of course "crisis pregnancy centers" that counsel against abortion.

Even worse, there is some evidence from heterodox economics that more information doesn't necessarily make for better decisions. General economic theory dictates that the more information is available to participants in a market, the better ("more efficient") the outcomes in that market should be. But that dictum is not always borne out in economic experiments; sometimes more information makes things worse. And we're not talking about more information like "this is what your BABY looks like!" (or "it's just a clump of cells"). I mean more information about things with ostensibly neutral emotional valence, like the underlying value of traded assets.

Is an hour or two enough to give financially naive people good information about mortgages, or just to confuse them? Is the state biased towards being too conservative? Even if the information being given is good, is the information the borrowers are taking equally good? As any blogger knows, no matter how clearly and effectively you think you are explaining things, misunderstandings are rife.

I'm tempted to say that scaring low-income buyers off non-traditional mortgages is an obvious, unalloyed good, given what's happening in the property markets. But there's an uncomfortable whiff of the paternal about that instinct. 85% of subprime mortgages are still in good standing; presumably, many of those homeowners would not thank me for preventing them from buying their first house.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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