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A basic tenet of economics is that incentives influence behavior. If people are properly rewarded when they do one thing instead of another, most will be more than willing to play along.

In ""Bank Governor Criticizes Lenders,"," Federal Reserve Governor Susan Bies explains the role that greed -- er, misplaced incentives -- played in the current subprime mortgage market debacle.

Eagerness among mortgage lenders to increase their fee income pushes them to sell as many loans as possible, even ones they know borrowers can't afford, outgoing Federal Reserve Governor Susan Bies said.

That is driving more people to fall behind on payments and default, she said.

Despite her clear understanding of what lies at the root of the current problems, Governor Bies does err in one respect: she fails to take her assessment to its logical conclusion. In ""Bad Mortgage Debt Not Widespread Problem, Fed Official Says,"" she suggests that the fallout will be contained.

Federal Reserve Board Governor Susan Bies Tuesday said the bulk of the mortgage market was not troubled by bad debt problems, which were concentrated in the subprime, tarnished-credit sector.

"One segment of this market ... is starting to behave in a very problematic way and that is the subprime adjustable rate mortgages," she said in a speech to the Duke University Fuqua School of Business.

"In the aggregate, what I'm talking about is a sliver that is 7 to 8% of all outstanding mortgages," she said.

Mounting debt delinquency and foreclosures in the subprime market, which lends to those with spotty or thin credit histories, as the U.S. housing market cools has been a source of concern for policymakers.

Most subprime mortgages carry adjustable interest rates — known as ARMs — with borrowers facing higher monthly payments as loans reset at higher interest rates.

But Bies' remarks played down the risk that mounting problems in the subprime market was having a broader impact on homeowners, which could have serious implications for spending and growth.

"I don't think there will be a large impact (from subprime market risks) on the prime mortgage industry. On the fringes there may be some. ... I think it's really in the subprime ARM market, it's isolated at this point," she said.

In reality, it seems likely that the same incentives that encouraged risky behavior in the subprime mortgage market influenced most, if not all, of the credit-granting decisions that were made in recent years.

Source: The Mortgage Market Debacle: It's All in the Incentives