Subprime Mortgage Lenders May Get Federal Bail Out

Wednesday, the Joint Economic Committee of Congress [JECC] issued a report on America’s housing situation, and the reading was grim. Nearly 2 million hybrid adjustable rate mortgages are due to reset, and the housing market is wobbly already. This means foreclosures are certain to rise this year and next. The Democrats in Congress are already preparing bail-out money for borrowers, and indirectly for lenders. They may be acting too hastily. They need to attach some strings.

Foreclosures don’t do anyone any good. The homeowners stops being a homeowner, undermining the stability of the family. The lender winds up with a property that it has to liquidate (usually at cut rate prices). And the neighborhood suffers as well. The JECC report says $78,000 is what a foreclosure costs the borrower, lender and community on average.

Enter Senator Charles E. Schumer (D-NY), chairman of the committee. He plans to offer legislation amounting to “hundreds of millions of dollars, maybe more” to help refinance mortgages people can’t afford to pay. The Washington Post reports, “That money should reach borrowers primarily through community nonprofit groups that are already helping homeowners refinance burdensome mortgages, Schumer said. But he has not worked out the details of whether banks and other groups would be conduits for the aid or where the money would come from. Schumer has said it might come from a federal appropriation or perhaps the Federal Housing Administration or mortgage financiers Fannie Mae and Freddie Mac.”

Mr. Schumer’s heart is in the right place, and a bail-out may be socially prudent economics. However, the reason subprime loans are in default heading to foreclosure arises from inadequate income in the first place. The lender simply offered terms that looked good in the first few years, and now that interest rates are rising and the rates are going up, the terms can’t be met. While the borrower may claim lack of knowledge in mitigation (only a bit, though), there’s no reason for these lenders to be in this position. Actuarial tables exist to tell them what they can and cannot afford to lend. Their greed got the better of them.

Offering money to restructure these mortgages gets the lender off the hook (and the borrower to a lesser degree) too easily. There needs to be some kind of penalty other than the general inconvenience of changing the mortgage terms. Tighter standards, greater enforcement of existing regulation, and perhaps greater limits on predatory lending might help. Markets are great at creating innovative financial products, but these loans appear to be harmful to the economy over all. If there’s to be a bail-out, there need to be reforms included in the package, or the country will be right back here the next time greed wins out.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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