Once a highflier in the booming market for making risky mortgage loans, the New Century Financial Corporation filed for bankruptcy court protection today.
Not sure how I feel about this news from the mortgage industry. Normally, I think home ownership is a net-good for society. But that shouldn’t be an excuse for lenders to make bad loans based on minimal documentation. I propose a pro-active solution: mortgage re-insurance based loosely on an FDIC model. The idea is that if the mortgage you issue fits certain defined criteria for being low-risk, you can purchase low-cost insurance to protect you if the person you issue the policy to defaults. The risker the policies you issue, the more you’d have to pay to insure those policies. It might even be possible to adjust the model to provide special cases for low income and first time buyers when those buyers work to improve their credit. And like FDIC, membership to this re-insurance body would be voluntary.
I’ve always been a big fan of the FDIC. I’d argue that not only is it the most successful government program in US history; it is the most successful government program in the history of governance.