Posted on 12/08/2007 4:42:53 AM PST by Kaslin
Like obnoxious relatives, the mortgage mess won’t go away. Some two million adjustable-rate mortgages (ARMs) will reset over the next two years, and analysts say that within the coming year alone, $362 billion in subprime home mortgages will experience rising interest rates. This will lead to ever more payment defaults and foreclosures, a horrible state of affairs not only for the affected homeowners and lenders, but also for the financial markets in general.
As is their wont, officials from both parties are rushing to offer “solutions.” The Bush administration is urging lenders to maintain the low teaser rates on ARMs, while Hillary Clinton recently advocated a 90-day moratorium on home foreclosures. Although casting themselves as knights rescuing beleaguered citizens from greedy corporations, in truth these politicians will only make matters worse.
In his classic Economics in One Lesson, Henry Hazlitt said that the good economist looks not only at the obvious, immediate beneficiaries of a government policy, but also considers the long run, hidden costs. We should do the same with the latest mortgage proposals. Although particular homeowners may benefit in the short run, such government tinkering will ultimately harm average Americans by distorting the mortgage industry.
To understand the downside of the recent proposals, we need to step back and ask ourselves why ARMs and foreclosure clauses exist in the first place. They are obviously advantageous to the lender, so it’s no surprise that banks favor them. But why do the borrowers agree to these terms? Why doesn’t everybody simply take out a conventional fixed rate loan, and moreover one that is unsecured—so that the bank can’t seize one’s house in the event of default? Is every borrower just plain stupid for failing to insist on loans of this nature?
Of course not. The reason borrowers agree to adjustable rates (which have the possibility of skyrocketing) and to pledging their home or other assets as collateral, is that this allows them to receive concessions from the bank—in particular, it allows them to borrow a great deal more money than would otherwise be possible. Very few people would persuade a bank to lend them money to buy a house, if the bank didn’t ultimately have the right to take ownership of the house in the event that the borrower couldn’t make the mortgage payments. Yes, borrowers would prefer that they get a $300,000 mortgage with no strings attached, but lenders wouldn’t be too happy with this arrangement. The beauty of a capitalist system is that property owners must compromise to reach mutually beneficial arrangements, since private transactions are voluntary.
Now after individuals enter into these voluntary arrangements, what happens if the government swoops in and invalidates them? There will be short term winners and losers, naturally. And most Americans have no problem with this, because it seems fair to help struggling homeowners at the expense of Wall Street fat cats.
Yet this conclusion is very superficial. Lenders will learn the lesson that their contracts aren’t safe; contrary to popular belief, the government will not serve to enforce the law. (Or rather, the “law” can change on a dime, depending on the public’s mood.) Lenders won’t simply shrug their shoulders, say “aww shucks,” and continue with business as usual.
No, lenders will rationally respond to the new environment, by being much pickier in giving new loans. After all, it becomes much riskier to grant a mortgage to a young couple with little job experience, if the government will shield them from the consequences of default on the loan. Many people say that “the American dream” involves homeownership, yet this will be harder to achieve if the government introduces yet another uncertainty for lenders.
I am aware that the real world process of home buying and financing has its share of shysters and shady practices; every human enterprise does. But the recent proposals aren’t merely about prosecuting outright fraud; no, the politicians want to grant a mulligan to hundreds of thousands who bought homes they couldn’t afford.
So why doesn't Robert Murphy complain about the Fed tinkering with the economy by alternately lowering rates too low and then hiking rates too high? That's where most of this mortgage mess came from.
Repeal the law of supply and demand!! Oh wait, that’s sorta the whole premise of capitalism isn’t it? That and taking responsibility.
It is the height of irony that Congress, which created the greatest Ponzi scheme in the history of the world with Social Security, should be passing laws to regulate the supposed sins of mortgage lenders.
Much of this mess would never have happened had the Democrat congressmen in the ‘80s not passed laws mandating that lenders give high-risk credit to low-income people. Remember all the whining about “red-lining” in the ghettos?
How convenient that Americans forget that in almost every case, Congress causes bigger problems with their “cures” for all our ills, yet, incredibly, they are never blamed because liberals and their enablers in the msm never admit mistakes.
This only benefits the lenders since the borrowers could probably rent at a lower amount.
The banks and Wall Street win again.
That is the scariest part.
...contrary to popular belief, the government will not serve to enforce the law. (Or rather, the “law” can change on a dime, depending on the public’s mood.)
And that is what got this whole mess started.
Let the market sort it out. If you can't afford the house, you shouldn't have tried to buy it. Don't expect your defeatocrat friends to bail you out with MY money, which is probably what they will do anyway.
So where exactly has the government stepped in and forced anything on the lenders?
I hear it repeated over and over but haven’t actually seen evidence of it. That would seem to matter... It does to me.
So much for those who took the risk to loan these idiots
the money. They’ll be the one’s getting screwed...that and the next person that tries to get a mortgage.
I have heard this claim several times. Do you have a source for this?
Because the people who set up the Fed made sure that it was unelected - and unaccountable.
Now, we might as well complain about the wind as complain about the Fed.
A lot of these people were told they could afford the house. The mortgage anyway. Most people don't know the money a house, even a new one, sucks in over a year.
Congress and the president can hold them accountable. Congress has the power to require testimony. It can also change any laws regarding the Fed. And the president has the power of appointment. It would also help if the press didn’t grant infallibility to central bankers.
Does anyone understand this is not what is happening? The government is not invalidating any contracts, at least not under Paulson's plan. This plan was worked up with the banks to help save banks from losing their butts.
I know. Lots of articles with lots of experts saying lots of crap, but none of them have a clue. The government has not stepped in and done anything. The current plan is a voluntary plan worked up between Paulson and the banks/financial institutions. Now if Congress steps in and tries to pass laws, that will be a different story. But so far, this is not a bailout and this is not the government forcing a solution on anyone. This is the banks volunteering to modify certain loans which are in their best interest to do so.
I used to work for a bank, doing reports for Feds. Salary and job ranking was reported by categories - Gender, race ,age. There was no law demanding that 10 percent of employees be black, or that women made the same money. But you can bet when the CEO’s reviewed these reports, they changed policy. You know the Feds were going to read them.
No law required.
Another factor contributing to the mess was the urging of the mortgage industry by the Feds to engage in 'creative financing' to accommodate almost anyone who was able to sign the documents.
Why did the Feds do this? They did so at the urging of the administration that wanted a robust economy. They created a false prosperity with all the wild spending of HELOC money, outrageous profits from 'flipping', builders laughing all the way to the bank and retailers not being able to stock the shelves fast enough.
Yep, our administration proved to be "all hat and no cattle" or more appropriately "all mortgage and no equity"
I think the whole push by the government to make everyone a home owner is the root of this problem, there are a whole lot of people out there that just can’t handle it.
The biggest problem was the mortgage funds that were used to finance these loans. Banks would take the risk of these types of loans, so they packaged them up into funds and sold them to investors as safe investments backed by mortgages with high yields. Of course, these subprime borrowers were anything but safe.
The ground work for these loans was layed by congress long before Bush II came to office. Congress complained that minorities weren’t getting their fair share of home ownership. So they demanded the rules be changed so it was easier for people to qualify... Hence “sub prime”...
At least that’s how I remember it...
And with all the “repackaging” they can’t even identify who actually holds/owns the mortgage...
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