For the past few months, barely a day has gone by without some newspaper or politician (or blog!) trumpeting the evils of sub-prime mortgages. The case is simple: Predatory lenders foist a complicated new kind of mortgage on a poor, unsuspecting victim which leads to foreclosure two or three years later when the rate ratchets up. An article in today’s New York Times, however, provides an interesting counterpoint to the hysteria. The article cites a new study conducted by Kristopher Gerardi and Paul S. Willen of the Federal Reserve Bank of Boston and Harvey Rosen of Princeton called Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market which makes the case that the enormous creativity in the mortgage market since 1970 has, on balance, been very favorable. As Professor Rosen explains, just because one is poor doesn’t mean you won’t make rational use of more creative mortgage products:

Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didn’t have enough assets in the bank at the moment they needed the house.

Rosen also points out that clamping down on the newer mortgage products may end up hurting the very people everyone thinks they’re trying to protect.
‘Irresponsible’ Mortgages Have Opened Doors to Many [NY Times]