Opt Out Mortgages

Behavioral economics has much to offer the world. One thing I've become convinced by is their emphasis on default positions. Michael Barr, Sendhil Mullainathan and Eldar Shafir explain how this isnight could be expanded creatively to mortgages. One of the problems in the subprime mortgage crisis appears to be people were taking out mortgages they really did not understand and which lenders did not clearly explain. In other words, the problem was one of asymetric information, leading many (like Krugman this morning) to argue that there was predatory pricing and just plain stupidity going on with the advent of various financial innovations (which Krugman said will one day become a curse word, after all the damage is done). The authors present a good case for making standard 30-year, fixed-rate mortgages with solid underwriting the default mortgage a person takes out, which then requires careful explanation by lenders to get a borrower onto something else. If people are myopic, then the costs of learning the details of their mortgage (which in my experience are substantial. The sheer intimidation factor alone is enough to make many people just try to get it all over with as soon as possible) necessary to making a rational choice about which package is best given one's risk preferences, etc., will ultimately lead a person to becoming rationally ignorant of the asset they've just invested in. This at least puts the default into something relatively safer, which is probably a better outcome for both many consumers and the macroeconomy as a whole.