The Wall Street Journal reports,
Lawmakers of both parties questioned Sunday whether law-enforcement officials did enough to monitor the activities of suspected Boston Marathon bomber Tamerlan Tsarnaev before last week’s terrorist attack, given his apparent extremist beliefs.
The failure to stop Tsarnaev was a type I error. However, there are probably hundreds of young men in America with profiles that have at least as many “red flags” as he had, and few, if any, are likely to commit acts of terrorism. One sure bet is that for the next several years we will see a lot more type II errors, in which the FBI monitors innocent people.
Speaking of Type I errors, type II errors, and Congress, I will be testifying at a hearing on mortgage finance on Wednesday morning for the House Committee on Financial Services. Part of what I plan to say:
It is impossible to make mortgage decisions perfectly. Sometimes, you make a reasonable decision to approve a loan, and later the borrower defaults. Sometimes, you make a reasonable decision to deny a loan, and yet the loan would have been repaid. Beyond that, good luck with home prices can make any approval seem reasonable and bad luck with home prices can make any approval seem unreasonable. During the bubble, Congress and regulators beat up on mortgage originators to get them to be less strict. Since then, Congress and regulators have been beating up on mortgage originators to be especially strict. I expect mortgage originators to make mistakes, but the fact is that they do a better job without the “advice” that they get from you.
Here is my talk on type I and type II errors for my housing course.
Concerning your first point, it is frustrating that our government spends stupendous amounts of money on our war on terror, but seemingly cannot handle these brute force activities.
Consider the following math. Let’s say there are 100,000 people in the U.S. that are identified as having a troubling profile. If the Dept of Homeland Security spent $10,000 annually keeping tabs on each person, it would be spending $1 Billion. If only we spent that much. Yet we consistently fail to see the government keep tabs on difficult people.
Loan officers are lending the government’s money, not their money, not their bank’s money. Why would you expect them to show due care?
I was at the center of the housing boom, and during the height of it, in the last few months before November 2005, every million dollar sale that I observed was a no money down, cashback under the table, sale to an unemployed no-hablo-english cat-eating wetback whose own mother would not have loaned him five dollars. Not a white in sight, not a lighter skinned Mexican in sight, not even a Mexican with a decent job and a green card in sight.
I have not personally observed what is happening now, the way I personally observed what was happening back then, but I am hearing stories along the same lines today.
Suppose the banker offers the mortgage borrower two choices: a lower rate with a mandatory futures position in a Case-Shiller index futures for the relevant geographical region (in practice, granted, basis risk may be an issue), or a higher rate but no futures.
Absent political machinations, I suspect it would help the dual objectives of more home ownership and greater mortgage lender stability.