The sky is falling! The sky is falling! What to do, what to do? So goes the mantra of the Bush administration, all the presidential candidates (except Huckabee) and both houses of Congress, especially those individuals running for re-election.
I am talking about the current subprime, adjustable rate mortgage "crisis." The solution is simple. Just follow the advice of Harvard Professor Gregory Mankiw, who was a former chair of the Council of Economics and do "absolutely nothing." This is a free-market system and will be solved within this system. Sure the economy is going to burp once or twice, and emotionally there will be wailing and gnashing of teeth. But, so what?
Even though the politicians and the bureaucrats are counting on your sympathy and compassion for those poor, innocent, naive borrowers who were defrauded by those big, old, mean lenders, don't let yourself get drawn in.
The real problem is a mix of falling housing prices, greedy lenders making bad business decisions, rising interest rates, easy credit granting policies and impatient borrowers not willing to live within their means.
It is certainly not solely the fault of the big, bad mortgage companies. Sure, they lent money to people who couldn't pay back the loans, but everyone thought the housing boom would go on forever.
Thus the banks would be covered with property worth more than the mortgage; and the lender, if the payments could not be met, could simply sell the home, pay off the loan and walk away with some equity in his pockets.
The last thing we need is for the federal government to come up with a solution, but that is exactly what it is trying to do. One proposal is for the Federal Housing Administration to refinance these risky mortgages for the low rate of 1 percent.
The Bush administration is for giving defaulters an additional 30 days before foreclosure proceedings begin. Hillary trumps that by suggesting a 90-day reprieve from foreclosure and also wants to freeze the rates of these mortgages for five years.
These are only a few of the solutions being offered. Unfortunately, of the 535 members of Congress, not a single one is a trained economist.
However, as congressmen, they should all know these efforts would be unconstitutional. These mortgages represent private contracts between borrower and lender. What right does the government have to just jump in and change the terms?
It is up to these two parties to solve the issues of refinancing, providing moratoriums or initiating foreclosure steps.
Yes, the lenders got greedy and made poor business decisions. They are the ones who will have to absorb the losses and be careful not to make the same mistakes again.
Economics 101 and the law of supply and demand apply here. The mortgage companies, not wanting to be in the housing business, are simply going to have to keep lowering the prices of the homes until there are willing buyers _ perhaps investors or young couples who have been saving responsibly and are looking forward to their first homes.
Now, regarding the borrowers. They aren't necessarily the innocent victims the media make them out to be.
Many banks claim that these borrowers are at fault by intentionally misstating incomes or lying about net assets. This was done so often that phrases have been coined for this behavior: "liar's loans" or "no doc loans." These borrowers simply got in over their heads and will have to adjust their lifestyles accordingly. Renting might be an option.
Also, some borrowers are pretty nonchalant in their behavior.
Michelle Malkin gives an example in one of her columns of a story that was in the Los Angeles Times. It was about Californians simply living in their homes for 12 months, awaiting foreclosure, saving their mortgage payments and then just walking away.
Does Washington really want to come to the rescue of these people?
Whatever the solution eventually turns out to be, hard-working, patient taxpayers who handle their finances responsibly shouldn't have to pay with their taxes to bail out people who made irresponsible decisions.
An economics professor at Temple University pointed out that 96 percent of all mortgages are being paid on a timely basis. He further points out that only 2 percent to 3 percent of all mortgage loans are in foreclosure and that the delinquency rates were higher in the 1980s than they are now.
Should the government come to the rescue of people taking irresponsible risks at the expense of responsible citizens?
I hope these responsible citizens who represent the vast majority of the electorate will make their dissatisfaction known in the voting booth.
___
Tom Sears is a professor of accounting at Hartwick College in Oneonta and was a delegate candidate for former Arkansas Gov. Mike Huckabee in the New York primary. He can be reached at SearsT@hartwick.edu. His column appears every other week.
Print this story
E-mail this story
