The Miami Mortgage Co.November 3, 2008
Just to the left of a Skyline Chili poster, and just under a cardboard moose head, my office wall displays a simply-framed piece of paper. The header on the paper, typeset with a formal font and black ink, reads “The Miami Mortgage Co.” The handwritten contents of the note are reproduced below
The Miami Mortgage Co.
Miamitown, Ohio 9/7 1921
This is to certify that Arthur Knose has purchased the John Fourger house at Harrison, Ohio for the sum of $1800. Three hundred to be paid on delivery of the deed $1500 to be carried by the Company. $25 has been paid on this bill.
The Miami Savings and Loan Co.
Amos Pickens, Sec’y
Arthur Knose was my maternal grandfather, and this paper is part of the mortgage contract for the home he bought in the town where he raised his family and where I too spent my early years. The contract is simple, unambiguous in its terms, and the mortgage security it represented was no doubt held by The Miami Savings and Loan until the day my grandparents paid it in full.
There are new lessons to be learned from this old piece of paper. The widespread practice of securitizing mortgage contracts has generated some important social benefits. It has allowed banks and credit unions to more easily manage risk and in so doing helped create a low mortgage rate environment. The American dream of home ownership has been helped in no small measure by securitization. But it has also had a potent downside. Securitization created anonomity between borrow and lender in the mortgage market. Amos, and his company, aren’t lending to Arthur anymore. Bank X orgininates the loan to Ron, packages it with other mortgages and sells it to who knows who in who knows where, who resells it to somebody living somewhere. Who’s on first?
This anonimity matters because it makes it nearly impossible to renegotiate the contract, even if it is clearly in everyone’s interest if that happens. No one wins when a home is foreclosed upon; not the bank, not the town in which the house is located, and certainly not the person from whom the house is taken. If my grandfather ran into hard times, he knew who held his mortgage and they knew him. In all likelihood they could work out a deal. Everyone could be made better off through an understanding of the idiocyncracies of the particular situation and a little communication. This ability to understand, and communicate effectively, on a one-on-one basis is lost in the current marketplace for mortgages.
The contract on my wall also has sub rosa moral quality to it. My grandfather would have known Amos. Arthur Knose would have rather been shot full of arrows than have not paid this debt. I can’t even imagine him uttering the word “brankruptcy,” let alone seeking shelter in it. The social and moral contract would have been very real for him. Who would be hurt if you walked away from your mortgage? You don’t know and neither do I, but my grandfather knew. And this knowledge led to more stable financial relationships.
We should not return to the days when all lending institutions held all of their mortgages on their books. That would be both impractical and unwise. But, as the upcoming election fades in the rearview mirror and we begin to take a tough look at reforming many of these financial markets that have caused us so much distress of late, we should seeks to balance the good from the past with the realities of modern markets. One place to start would be to analyze the social welfare effects of a requirement that those financial institutions which originate mortgages hold some proportion of those mortgage assets on their books — not 100%, not 0%. I don’t know the correct proportion to balance the advantages of securitization with the advantages of reduced anonomity. But it sounds like a solvable problem to me. It is also not the kind of regulation that would lead to the Potemkin battles between the left and the right. Much like Arthur Knose and Amos Pickens, there is a broad common ground here where we can all be made better off.