Matt Yglesias is not comfortable with how easy it was for him to get a mortgage, and talks about it in his post, “Financial Innovation Takes the Homework Out of Banking.” An excerpt:
An old-school local bank can expect the people supervising loan applications to have specific knowledge about situations. And perhaps more importantly, the head of a small institution can directly monitor what his subordinates are doing. And while he perhaps can’t have detailed information about everything that’s going on, he can have general knowledge of the local economic situation.
But when I got my mortgage from Bank of America, it’s not like there was some plausible worry that Ken Lewis was going to knock on the guy’s door unexpectedly and make sure that everything was being done right. You can’t really have a homework-based system at a giant institution. Things need to be handled through bureaucratic processes and rules and formulae.
I like the post, but what I really like is the quality of the comments, most of which are on point and contribute to the discussion. The comments include discussions of the expense of good due diligence, the role of rules in preventing discrimination, whether or not due diligence makes a difference in a severe recession, whether or not predicting someone’s employment prospects is possible, the scalability of underwriting supervision, the failure rate of large versus small lenders, the role of securitization. There are some of the usual “CRA/Fannie Mae/minority lending are to blame” commentators, but on the whole Matt’s got a good group of readers.
I have two contributions to the discussion. The first is that even if big lenders and small lenders want to do their homework, they don’t know what to study (see Why What You Know About Income Property Performance is Probably Wrong). My second observation is that by cutting underwriting steps the lender can reduce costs, decrease the time spent from application, and reduce uncertainty in delivery, all of which improves their competitive position (see Why Did WAMU Abandon Underwriting Standards?).
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