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Can People Learn to Be Good Borrowers?

posted by Bob Lawless

Today's New York Times has a story about a mandatory mortgage counseling program here in my home state of Illinois. The pilot program started last fall as a way to deal with skyrocketing mortgage foreclosure rates. The idea was that persons who wanted to take out a mortgage in the ten zip codes with the highest increases in foreclosure rates would have to go through a mandatory financial counseling session. The program was suspended in January after charges of racial discrimination because the ten zip codes were concentrated in areas with a high percentage of minorities.

I'll leave to the NYT story the details on what might happen next (including a possible reintroduction and expansion of the program). Rather, what intrigued me were the reports about experiences while the law was in effect. The story quotes a report from the nonprofit Housing Action Illinois: "More than two-thirds of the borrowers were spending more than 60 percent of their take-home pay on housing expenses. And 75 percent of the borrowers were refinancing existing debts; the rest were buying a home." Further in the story, it goes on about the persons who borrowed after counseling:

While the counseling sessions persuaded some like Ms. McKinney to back out, counselors said that other borrowers went ahead with dubious loans, because they felt trapped by credit card balances, medical bills and other debt. . . .

It is unclear how many borrowers who were counseled closed on their mortgages, since the state has not provided an analysis of a database it maintains on the loans. The Greater Southwest Development Corporation, one of the counseling agencies, estimates that up to 60 percent of the people it talked to closed on a loan, based on a survey of public filings. But it does not know how many renegotiated the terms of their loans.

It seems to me there are two possibilities here, generally speaking. First, it is entirely possible that the counseling was simply unhelpful. Given the experience with analogous credit counseling before filing bankruptcy, it could be that this mortgage counseling was not designed to be very useful. The story does discuss the experience of one borrower who found the counseling little more than verification of the documentation she already had provided to the bank. Second, it could be that we are not constructed to make good borrowing decisions because of overoptimism and other well-known biases that are part of the human condition. Either possibility (or, most likely, a combination of the two) suggests it might be most effective just to regulate the terms under which high-risk borrowing can occur.


Your first conclusion is probably correct. The idea is sound, but implementation was weak. Your second point misses the point. While people could be overly optomistic, I doubt if that is the case if the areas were low income neighborhoods. What would be the source of this alleged optimism? Your post notes that many people closed on bad loans anyway, feeling trapped by OTHER DEBT. In other words, the counseling was too late. The damage was done by prior bad financial decisions.

The topper is that the program was stopped because of alleged discrimination. Using this rationale, shouldn't we stop research into curing sickle cell anemia, too.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.