Georgia mortgage loan for bad credit

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 Rep. Maxine Waters (D-CA) and groups like the big-city mayors, would impose very strict federal controls on the subprime mortgage industry, and leave states free to impose further restrictions. Another approach, manifested in Ohio Republican Robert Ney's "Responsible Lending Act" and backed by the banking industry, would impose somewhat less stringent federal regulations, and ban states from creating stricter regulations (a practice called federal preemption).

Greve dislikes both proposals. "The demand for higher federal standards is seriously misguided," he writes. "But so is the industry's demand for federal preemption."

Truly burdensome federal standards, Greve contends, could crush the subprime market and thus leave a significant portion of the population without any access to mortgage credit. Even the more modest federal standards proposed by Ney will backfire in the long run: Activists will ensure that the standards become more stringent than the bill's sponsors intend, and the standards' vagueness will let legislatures and aggressive state attorneys general impose additional restrictions anyway.

The best system, Greve concludes, is the one we have now: letting states write their own rules. Federalism alone can preserve the subprime market because it "permits a whole lot of creative activity in the states, while making it very hard to arrange a national deal that would close the economic frontier before it is settled."