A behavioral economist has a suggestion for Obama’s mortgage rescue.
Plain vanilla loans – the nickname given to the traditional 30-year fixed rate mortgages by the Obama administration, are taking support from University of Chicago economics professor Richard H. Thaler. He strives to define the line between practicality and innovation. In his New York Times article, he writes, “A better approach is to strive for maintaining diverse options but helping consumers make smart choices and avoid the most common pitfalls… (Here are) two main selling points. First, inexperienced borrowers are steered toward the vanilla mortgages, the terms of which are chosen to be easy to understand. Vanilla mortgages would be the equivalent to the green runs at ski resorts that are intended for novices. The rocky-road mortgages would at least come with warning labels (‘Don’t even think about going down this run unless you are an expert skier, or have a trusted professional instructor by your side’), and it is possible that for very exotic mortgages, borrowers might have to demonstrate that they understand the risks or have been aided by a certified mortgage planner. Second, because the terms of the vanilla mortgages are all the same, they are more easily comparable; just as in the good old days, the A.P.R. will be a good basis for assessing the cost of the mortgage.”
Take it from the man who pushed for the idea that the power of mass psychology is superior to the perceived “market efficiency” long heralded by economists. In fact, we see no reason why Thaler should defend his behavioral economics-rooted ideas anymore. His suggestion on how lenders should cooperate with Obama’s program is a reminder that they should lay down borrower’s options even those that do not constitute huge profits for them.