Here Come De Tooth Fairy

Hundreds of years ago, banks and insurance companies — the businesses are related; both need to quantify risk — went belly-up fairly often. Folks could be left in the lurch.

Most consumers probably assume that can’t happen today because of government regulation. Indeed, regulatory standards may have helped. Though it could be argued a consumer presumption that “Nothing can possibly go wrong” presents a new , counterbalancing danger.

But the main reason such companies now do a better job of setting their premiums and interest charges to earn respectable returns while staying competitive is something else entirely: actuaries.

Hundreds of years ago, how did an insurer judge the risk that a merchant ship would sink? If two of the last 20 ships had gone missing, he might assume the risk was 10 percent, and set his rates accordingly. If three of the next six ships sank, he went bankrupt.

Today’s actuaries have gathered a whole lot more data. Working with bigger numbers, they can give bankers a far more precise estimate of how many borrowers will default. Rates are then set to show a competitive profit despite that anticipated failure rate.

But now imagine a new factor is inserted in the equation. Instead of courts and judges working as neutral referees in the enforcement of those written loan contracts, judges presiding over bankruptcy cases are suddenly empowered to play Santa Claus. A new law gives them the power to adjust interest rates, payback periods — even to declare the amount owed the lender is less than the amount actually loaned!

This throws all those carefully tabulated reams of actuarial data into a cocked hat. How the heck does a lender now figure his real risk of loss?

One thing is for sure — just to be on the safe side, lenders would have to demand higher down payments and higher monthly installments, covering themselves against the new uncertainties of a court system where Vanna White might just as well spin her wheel to figure out how much the lender gets.

In Washington, the Congress now contemplates the Emergency Home Ownership and Mortgage Protection Act. Provisions of that bill would allow judges presiding over bankruptcy cases to alter homeowners’ mortgage terms, including interest rates, payback periods and principle balances.

Mortgages would no longer be viewed as contracts. More like a “list of suggestions.”

The Mortgage Bankers Association sat down to estimate how this version of “Wheel of Fortune” would impact new mortgage loans.

The results? The mortgage bankers estimate that allowing for the new uncertainties introduced into the market by this bill would require pushing up interest rates on future mortgages by 1.5 percentage points. That would mean an increase of $217 per month on the average Clark County home loan of $217,541.

The bankers, of course, have a vested interest in opposing such a breakdown of the old rule that courts are supposed to enforce written contracts. Local real estate attorneys argue the bankers are exaggerating.

Maybe. But there’s no doubt the law is intended to allow judges to play Tooth Fairy to those who unwisely entered into mortgage deals they can’t afford — and that banks required to make up those losses elsewhere will inevitably have to charge the difference to good customers who pay their bills.

Yes, federal laws prohibit lenders from “overcharging” borrowers to cover such added risks. But — leaving aside the wisdom of that degree of micro-management, in the first place — those regulations are triggered when loan rates go up by 3 to 4 percent. The bankers’ estimate of a 1.5 percent pass-along would be perfectly legal.

Congress should avoid this feel-good Band-Aid. The best way to shorten the period of pain is to let the home market correct itself. At that point, hard-working Americans who have been saving for a down payment will find more homes on the market at lower prices — and banks who want to loan them money will know the courts can still be depended on to enforce those contracts.

The congressmen don’t seem to have enough money in their own checking accounts to pay off all the mortgages now threatening to default. (Thanks Lew Rockwell). They should just admit that — instead of reaching into ours.

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