Unintended Consequences

Unfortunately, the free market is going to take the blame for this economic fiasco when interventionist government policies and lax regulation were significant contributors. The federal and state governments have been trumpeting their success in recent years of record high home ownership rates. This was a government fix and certainly at least part of the cause of our current situation.

Regardless, the government is under tremendous pressure to "fix" the deleveraging that the economy is experiencing. Nearly all government fixes, well intentioned or not, have less than desirable outcomes.

We'll look at just one policies I found reading Housing Wire.com. The policy is basically a foreclosure tax in New Jersey I ran across.

New Jersey Looks to Charge Lenders $2K Per Foreclosure

New Jersey is going to suffer in several ways, first, like nearly all "taxes" this one will ultimately be passed through to home buyers, particularly below prime. For the lenders clawing for survival, this could be the push off to bankruptcy resulting in the destruction of weak businesses at the margin. In Addition, Lenders will substantially tighten lending standards, avoiding the risk of default from home buyers buy requiring higher down payments, more fees and higher rates.

Fewer of the people this is designed to help will have access to mortgage credit. In the longer team, once this financial disaster unwinds some lenders will not expand or open in New Jersey. So, the unintended consequences are reduced number of servicers in the long run, tighter lender standards, higher down payments, higher interest rates and higher fees.

To many this seems obvious, but to many this isn't. New Jersey residents will never see the servicer that didn't open shop and they won't necessarily notice the higher costs for mortgages in there state since all lenders will pass this on. For the servicer's that don't survive some will even cheer. Over time mortgages will be a little more expensive in New Jersey.