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Mortgage rates 620

Prices in financial markets are expressed as expected rates of return on financial instruments, which in debt instrument are quoted as interest rates.[1] Why exactly would the borrower and saver agree to pay or receive a rate of return or interest? Is that part of God’s creation design? We argue yes, as follows.

First consider this from the borrower’s perspective. Ideally, the borrower will be willing and able to pay interest because he or she can use the borrowed resources to produce greater resources in future. These productive opportunities have been created by God and include things like shelter so the borrower can stay healthy, planting seeds to grow a crop, gaining skills through education, building a road or factory, or buying a machine that can make something useful. Time periods and productive opportunities are both parts of God’s created order. This is one-half of the important foundation of interest rates.

For the second half of the foundation, consider this from the lender’s perspective. The lender is willing to give up access to some resources until some future period for two reasons. At present he or she has more resources than needed. But later, there is likely to be a future period during which he or she will need additional resources, in retirement for example. It makes sense to let the borrower use the resources for a period of time and return them later. To give up control of the resources for a while the lender will want compensation at least equal to the next-best use for the resources. The lender’s diminishing appetite for current consumption and knowledge of likely future time periods in life are direct results of God’s creation of humans as finite and time-bound.

Thus, the productive opportunities and human consumption needs created by God, along with the above eight foundation of finance, form the basis for interest rates. Interest rates are not some aberrant human idea; rather interest rates are an institution which flow directly from God’s creation design. Furthermore, a well-priced interest rate can benefit both the borrower and lender, and will be the result of a voluntary mutually beneficial exchange.

Interest rates are a key part of stewardship. This price mechanism allows for clarity in resource allocation decision making. If you are paying interest, you have an incentive to borrow only if it helps increase your future productivity. Interest discourages you from borrowing simply to live above your means because you have to pay back more tomorrow than you consume today. The interest rate mechanism encourages good stewardship of financial resources over time. However, we caution against assuming that this mechanism will automatically lead to the “care” part of God’s creation mandate. Not every project with a positive financial return will lead to creation care. It will take thoughtful finance participants to work within the context of interest rates to care for God’s creation.

Interest rates facilitate and stimulate a just re-allocation of resources. Interest rates provide a way for those members of society without resources to gain access to resources simply by agreeing to fairly compensate the lenders for the temporary use of the resources. Interest rates allow sharing of resources to be voluntarily agreed and mutually beneficial. Interest rates allow a financial transaction to be good for both parties. Without interest rates (i.e. a zero interest rate) financial activity would be a gift from lenders to borrowers. Without interest rates borrowers would be attempting to gain free access to lenders’ resources. This would look a lot like begging, which is perhaps not the best way for justice to work. However, God in his creative genius arranged that one way justice can occur is via sustainable voluntary mutually beneficial activities among humans, one of which is what we call interest rates.

Can a Market Exchange Really Be Love?

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The question of prices raised two questions about finance as a form of love. First, can love be expressed in a market value-exchange relationship? Put another way, if both borrower and lender expect to gain from the relationship, is either one really doing it out of love? Second, since most financial transactions are at arm’s length, can one love another human even if there is no personal relationship?

Can one person love another through selling something at a price? Recall that our idea of love is seeking to bring about the flourishing of another human as an end in itself, and with due respect for that person as a human. The answer is yes. People bring about others’ human flourishing all the time through providing goods and services at a price. When farmers provide wholesome food, they help consumers to flourish, even though consumers pay for the food. We don’t regard good teachers as mere mercenaries simply because they get paid. The majority of work in modern economies is paid, and the goods and services produced by work are sold at a price. If charging a price negates the possibility of love, then virtually no work could show love.

Why is it that market-rate finance somehow seems less capable of showing love? Perhaps it is because money—unlike teaching or farm produce—seems like an undifferentiated product. A farmer shows love by selling good produce. Can a lender show love by lending good money? The answer, surprisingly, is yes. The money itself is not better or worse than any other money, of course. But the circumstances, conditions, and terms of lending are all opportunities for borrowers and lenders to care for one another. The duration of the loan, its payback provisions, collateral requirements, default penalties, insurance, inflation protections, and countless other terms can make a loan better suited to enable the borrower and the lender to flourish. Income verification, property assessment, due diligence, understandability of loan documents, availability of unbiased information, and other factors related to initiating the loan can also show care and respect. The location and convenience of bank locations, loan officers, rate comparisons, community engagement, advertising, and other factors can help reach underserved communities. Credit counseling, respectful dialogue about the use of proceeds—whether for consumption or investment in productivity, product education, and other factors can show love by helping people avoid borrowing if it is likely to harm them. For equity transactions, the openness of markets, the accuracy of financial statements, the integrity of people with inside information also care for and respect investors. Even though the money itself is the same from one lender to another, the love—that is, the care and respect—can vary widely.

For example, a mortgage lender may help a low-income family buy a house instead of renting. If the house, the interest rate, the loan period, the income verification, and all the other factors are handled properly, this can be a tremendous benefit for the family as they begin to build equity. It also benefits all those who lend the money involved, typically bank depositors or pension funds. Similarly, an investment bank that helps an entrepreneur issue an initial public offering to raise capital to grow the business brings a kind of love to the entrepreneurs future customers, employees, suppliers, and community, in addition to the shareholders who purchase the stock. All of these are market-rate transactions that bring love to bear for both borrowers and lenders.

Finally, love can be shown by honoring and fulfilling the promises made in the transaction. Of course much of this is required by law, but here we are arguing that love is shown in market transactions by going above and beyond the law by acting in the other party’s best interest even if it is not required or deserved and even if there is no expectation of a future benefit of doing do so. This means seeking the flourishing of the other party as an end in itself. Again, markets for other goods and services routinely do this—think of health care, for example—and there is no reason finance cannot do the same. Most if not all market transactions could feature this kind of love, and many do.

Does the Bible Prohibit Charging Interest?

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Another question is whether financial prices—interest in particular—are prohibited by the Bible. For centuries Christians have debated the applicability of the biblical texts which seem to prohibit interest or the taking of collateral[1] as for example in this passage:

You shall not charge interest on loans to another Israelite, interest on money, interest on provisions, interest on anything that is lent. On loans to a foreigner you may charge interest, but on loans to another Israelite you may not charge interest, so that the Lord your God may bless you in all your undertakings in the land that you are about to enter and possess.(Deuteronomy 23:19-20)

To explore this and other relevant passages, see “Employing Assets for the Common Good (Deuteronomy 23:1-24:13)”, “Lending and Collateral (Exodus 22:25-27)”, "The Sabbath Year and the Year of Jubilee (Leviticus 25)”, “The Righteous Man Does Not Take Advance or Accrued Interest (Ezekiel 18.8a)”, “The Righteous Man Does Not Oppress, But Restores to the Debtor his Pledge (Ezekiel 18:5,7)”.

For the most part, Christians have concluded that interest is not inherently prohibited in modern societies, but that lending practices— including interest rates and collateral—must not take advantage of vulnerable people or make people destitute. This is in fact what we are advocating here—that finance is meant as a means of stewardship, care, and respect.