Government and the Law of Unexpected Consequences

Wisdom is the ability to see the long-term consequences of our short-term solutions. It is easy to find a path from “A” to “B”. It is but one step, but the wise person visualizes the inevitability of “C, “D”, “E”…that must follow once we have taken that first step.

Our compassionate legislators have helped the poor by reining in the costs of buying a home. Under the new rules, closing costs are not allowed to exceed a certain percentage of the loan amount. This has no effect on large loans, but is designed to prevent low-income buyers from paying “too much” to buy a low-priced home.

I’m sure that sounded good to the folks in Washington, DC, but in the real world (where the rest of us live) closing costs are a conglomerate of fees charged by several separate entities – not just by the lenders.

For example, before a lender agrees to make a loan, they order an appraisal. The appraisal is prepared by someone unaffiliated with the lender. This protects the buyer from an unscrupulous lender claiming the property is worth more than it actually is. Of course, it also protects the lender from accepting an over-valued property as collateral for the loan. Anything that protects both parties is a good thing, right?

The effort involved in appraising a $40,000 house is not really much less than the effort needed to appraise a $400,000 house. The fee is part of the “closing costs”.

Likewise, the company that researches the title and issues Policies of Title Insurance must exercise the same due diligence, regardless of the actual dollar value of the property in question. It doesn’t cost less to research the title for a low-priced home. Another fee that’s part of the “closing costs”.

In other words, most of the costs that comprise “closing costs” are not related to the purchase price or to the amount of the loan. And, most of the costs are not exorbitant fees arbitrarily set by greedy bankers.

By insisting that those costs cannot exceed a percentage of the loan amount, the government has made it economically impractical to issue loans under certain amounts, since the allowable closing costs are insufficient to cover the actual and necessary costs. As a result, most lenders will not offer a mortgage of less than $45,000 to $48,000. They can’t do everything that should be done on loan packages of less than that.

Now, here’s where the unintended consequences come in…

There are many properties on the market that are available for less, but, thanks to the government, people who can afford those homes can’t get financing to purchase them. These are the same people Congress claims to want to help.

The homes are still being sold, but only for cash. In a cash transaction, there is no loan so there is no restriction on the closing costs.

People who can only afford homes in this price range usually don’t have enough cash to buy them without financing, so these homes are being bought by investors who will rent them out. The rents will be considerably higher than the costs of home ownership, but low-income people will have no choice but to pay the higher rent.

Sometimes I wish government would stop helping us!