Rethinking Markets

Interesting article from the Washington Post (although the fact that it was written by an attorney and a history professor on the opinion pages make me wonder how they know what the decision-making process was behind the scenes). The crux of the story is that a couple had trouble purchasing a round house, because the qualities that make the house unique are also qualities that make the house difficult to make comparable:

We were pre-qualified for a loan; with two professional incomes, good credit and enough cash for a 20 percent down payment, that would not be our problem. Yet two mortgage companies turned us down. The first did so after its investors – big banks with household names – rejected our application. The second mortgage company’s internal underwriters also rejected us. Their reasons were the same: The home, a customized modular house of internationally acclaimed design, built in 1989, is . . . round.

Being “unusual” or “unique,” it was deemed “not marketable.” Despite its evident worth and multiple independent appraisals, the lenders said they could not assign a value to the house because there were no comparable properties. And, with no “value,” there was insufficient collateral for a loan.

This is a kind of obvious example of how different qualities matter to different constituencies, but also that some interests are able to assert themselves a little bit more than others. If they can be believed, it was investors in two mortgage companies “big banks with household names” who turned their application down.

There is something banal here, of course. The models require data, and a small number of like houses make the risk too volatile. And when they say things like “The mortgage industry apparently only wants us to buy what everyone else has (or had),” it makes me think these two authors are kind of assholes who are deliberately taking potshots at what is an obviously more complicated issue than what “the mortgage industry” wants. Institutions are desperately seeking ways to manage their risks; in the face of massive criticisms over decades of old-fashioned, face-to-face treatment of clients, the industry moved to more formal risk models; the quantitative and data turn in finance meant that these models have more than a skosh of seemingly inflexible, rules-based tint to them.

What is interesting, however, is the inability for individual discretion to intervene. Though of course, I suspect that within hours/days/weeks of this article being written, the poor professionals were able to purchase their dream house, because of – what? – individual discretion. In the mortgage industry, for good and bad (and bad), evaluating individual level risk is hard, and in absence of the ability to sort through a client’s biography, instead the client is reduced to a case. And then the circular house becomes a problem.