Charles Brown writes: >> CB: If your money is secured by the house, why are you taking any risk at >> all ?
David S.: Charles -- read the paper. Sub-prime mortgage lenders are falling like cards. Home lending is not risk-free. Even in the prime market, there are defaults. ^^^^ CB; Yes, by definition, "sub-prime" mortagages have a high risk that the borrower will not be able to pay back. But, the lender knows this. There is no reason they should get extra compensation. Also, and perhaps more importantly, the lenders of sub-prime mortgages do it because they won't make any money on money that they don't lend. Money, contrary to a myth at the center of all this, does _not_ reproduce itself if it just sits in the rich person's vault. So, the chances of making money off of money that is not lent is zero. So, the borrower of subprime mortgages is doing the lender a favor by giving them a chance of making money off of money that the borrower would not have made if the money had not been lent. Why not emphasize that the borrower is giving the lender a "negative risk", a positive chance that the lender wouldn't have had otherwise. The lender should pay the borrower for that chance the lender otherwise wouldn't have had. ^^^^^^ David: Foreclosure is not inexpensive for the lender to administer. ^^^^ Yes, pay the secretaries and clerks who do the administrative work. But that is charged on top of interest. It can't justify interest. Also, the lender should pay his share of those costs, because the lender is benefiting from the administrative work. The borrower and the lender should share the administrative costs. They shouldn't all be dumped on the borrower. ^^^^ Furthermore, there is the risk that interest rates will change. In other words, if I am a lender and make a home loan at 5% for 30 years, I am locked into a specific interest rate for a long time. If interest rates go up, I am limited in my ability to liquidate my 5% investment and invest at the higher rates. Alternatively, if interest rates go down, the borrower can refinance me out and I am looking at a lower rate. (Prepayment penalties have some ability to reduce the latter risk.). ^^^^^^ CB: I don't see why the borrower should pay the lender for the ups and downs of the interest rates. Or just wait and see what happens. If interest rates go up, the borrower pays some more. If the interest rates go down the lender pays the borrower some money back. Should work both ways. As of now, the lender is the only one who benefits from shifts in interest rate. ^^^^^ >> CB: So, they are compensated for advice , not for the loan of money ? I think you are again confusing questions. Of course the investor is paid for the loan of the money. ^^^^^ CB: We are debating the "of course". It is not obvious. I don't buy the idea that $1.00 today is worth $1.03 tomorrow. You just assert that without proving it. Or lets say the idea that people want to spend money today more than tomorrow has to be demonstrated better than you have. I want money today and tomorrow, both (of course). I need the money for today , today, and the money for tomorrow , tomorrow. ^^^^^ But we are discussing the societal "value" added by the investor. Imagine two entrepeneurs who came to an investor in 1980. One had a great idea for making better typewriters and the other for making better portable computers. If the investor invested in the typewriters, we know in hindsight that the money would have essentially been thrown down the drain with a net loss to society compared to the investment in portable computers. The decision to invest is not made blindly by investors. They do due diligence and provide a lot of intellectual firepower to investments decisions. The investor is an integral part of the process of determining the allocation of capital. David Shemano ^^^^^^^ CB: The investors who advised someone to invest in typewriters shouldn't have been compensated for their advice. They should be required to pay back what they were paid for that lack of due diligence and intellectual weak stuff, no ? Wouldn't that be the best way to do it ? The contract should involve looking to see whether the advice is good or not. If an investment does good, the investment advisor gets paid. If the advice is bad, they don't get paid or they have to pay the person for giving bad advice.
