Richard Thaler on Mortgage Reform: Simplify! Thaler is a behavioral economist from the University of Chicago Booth School of Business. He has been instrumental in shaping Obama’s early economic policy (in tandem with Austin Goolsbee). In yesterday’s Times, Dr. Thaler weighed in on the debate over mortgage reform. In his reading. many subprime borrowers (even prime borrowers) did not understand (tangent: real shocker right?) the complex mortgages that were marketed and sold to them during the housing bubble. Debtors were lured by specious teaser rates, balloon payments, and prepayment penalties. So isn’t the solution fairly intuitive? Make sure consumers who take on mortgage obligations understand the full costs. This “back to the future” approach suggests a return to “plain vanilla” 30 year, fixed rate or 5 year adjustable rate mortgages. Financially savvy borrowers should have the option for more sophisticated mortgage products if they can prove they understand all costs and risks.
