I couldn’t resist offering a comment on President Bush’s subprime mortgage proposal for my first posting here at LockeSmith. From Forbes:
US President George W. Bush is set to announce for the first time a series of measures aimed at easing the US mortgage crisis marked by rising defaults and foreclosures, US media said today.
The proposals target homeowners who have fallen behind on their mortgages and are the administration’s first official response to the troubled US housing sector which has riled world markets over the past several months.
Among the measures included are a [program] that would allow people to refinance with government insurance if they are unable to pay adjustable rate mortgages, which offer low introductory rates but can rise over time.
For free markets to work, they need to be left, well, free. We had a series of mortgage companies make bad loans to people who should not have taken them in the first place. No money down, interest only, variable notes known as subprime mortgages. This created a huge speculative bubble in real estate. People bought houses way beyond their means, while others snapped up condos hoping to quickly flip them for a profit.
Over time the market always catches up with such risky economic behavior. That is what is happening now. The bubble has burst and housing prices are adjusting back to a more sustainable level of growth. Or so we thought….
Now President Bush decides to step in and spend what could be billions of dollars to “rescue” the market. All this is doing is postponing the day of reckoning.
People made poor economic choices. Why should the rest of us be left to pay the bill to cover their assets?
Your ending question is very appropriate. In fact, you could broaden the scope of that question and appropriately assert that “the rest of us” pay the bill in a lot of other economic situations. Somewhere in all of this we need to remember that honest, hard working people, were duped by mortgage brokers selling products to them without the best of intentions. Certainly part of the blame falls on the individuals that didn’t read the specifics on the notes they signed, but how can you blame people who were trying to attain homeownership when prior to these products homeownership was unattainable.
So where do we draw the line on this? Any time citizens have good intentions but make poor decisions it is up to the rest of us to pitch in without any choice through our taxes? In that case I think I will build a house on a barrier island as an investment property. And when the next hurricane washes it away into the ocean I will look to the government to bail me out of my losses…Oh wait, we already have that program, too.
Aside from our vote in 2004, you and I don’t get a say when it comes to the President’s decisions. I’m not saying that he’s about to do the right thing or the wrong thing. What I am saying is that as a collective society we worry about ourselves above all else almost without exception. Instead of throwing all of these people under the bus, can we not try to understand their plight and realize that maybe some or a lot of them fell victim to shameless business practices?
I TOTALLY agree.
Why must we create a new social program which rewards poor financial planning?
We can’t reward the people suffering from losses stemming from speculative real estate market risk.
I’m so glad people are beginning to realize that its not our job to bail everyone out!
I wrote about my take on subprime and would appreciate your comments:
http://councilofnicea.blogspot.com/2007/08/busting-predatory-lending-myth.html
Just like the S&L crisis left us with a legacy of complicated paperwork for any kind of a loan, this new mortgage problem will end up with complicated new laws that will add a additional new giant amount of red tape for anyone who wants to buy a house in the future.
I feel sorry for all of these people stuck with expensive loans, but the reason why they were “subprime” loans in the first place is because they are by definition riskier.
Therefore, it only makes sense that a subprime loan should have a higher interest rate, because the risk of default is high.
In fact, lenders probably set the rates too low, as you can see by the huge losses they are going to take when they end up with massive default rates.
I do think it’s criminal that lenders and brokers would steer people to such terrible types of loans and encourage people to borrow more than they could ever afford to carry. I don’t see how those people can sleep at night.
Maybe the humane thing to do would be to allow the default to have some lesser effect on a credit report that it otherwise would for people who were steered into bad loans.
Although even that strategy is questionable, because you could already buy a house with a bankruptcy before. So it isn’t entirely clear that the bad credit (up until recently) would prevent them from buying something in the future.
“Why should the rest of us be left to pay the bill to cover their assets?”
We get to pay the bill because doing so is American! What a great country we have where, thanks to the social contract we entered into at birth, everyone has managed to put him or herself into a position to be responsible for everyone else. I don’t know about you, but if this isn’t the best freedom yet, I don’t know what is. Keynes would be proud. Mises is rolling in his grave.
It breaks my heart to see this kind of action (and I’m a Bush supporter). Anytime the government steps in to clean up a mess it’s citizens have gotten themselves into because of their own ignorance or irresponsibility, more of our rights dissolve. We don’t need MORE government involvement, we need LESS!