In an attempt to “do something” about the subprime mortgage meltdown, there’s a real danger that the Bush administration and Congress will make a bad situation much worse by bailing out unwise lenders who thought themselves above the laws of economics. Doing that would tell the rest of the nation’s financial sector not to worry about straying from standard business practices because government — i.e., taxpayers — will always bail you out.
If the Justice Department’s current investigation of more than a dozen mortgage lenders finds evidence that any of them used fraudulent assessments or other dirty tricks to lure homebuyers into signing the estimated $139 billion worth of unsustainable mortgages now on the books, they should be punished accordingly — even if that means letting them goout of business.
Missing from much of the media coverage of the subprime fiasco is the significant role Fannie Mae played during the Clinton years in lowering mortgage underwriting standards in order to raise the rate of homeownership, particularly among African-Americans who had long suffered from decades of redlining, a practice in which banks refused mortgages to anyone living within specified — i.e., “redlined” — neighborhoods. This manifestation of institutional racism kept otherwise qualified minorities from buying homes that would have been their crucial first step toward accumulating sufficient wealth to be passed on to following generations.
Minority homeownership rates did, in fact, go up. But these good intentions also produced unintended consequences. Fannie Mae loosened its requirements for “conforming” loans, so people who would otherwise not qualify for a mortgage because of a bad credit score, no credit history and lack of a 20 percent down payment were suddenly offered “creative” home financing. Lenders didn’t care about the relaxed standards because, after front-loading adjustable-rate loans with fees to get their money back up front, they just dumped them on Fannie Mae or sold them on Wall Street as mortgage-backed securities.
When the speculative bubble finally burst, as such bubbles must, billions of dollars’ worth of bad loans and thousands of foreclosed homes sent shock waves not just through the nation’s real estate markets, but global financial markets as well. But the Bush administration’s interest rate freeze merely postpones the inevitable, as would the moratorium sought in Congress on the 2 million foreclosures predicted by theend of this year.
Most experts predict the shakeout will be painful and costly, perhaps dragging the U.S. economy into recession. But a multibillion-dollar bailout would reward predatory lenders and unwise borrowers for taking speculative risks based on the unrealistic assumption that home prices would never go down. Millions of people who didn’t fall into the easy credit trap would be forced to pay for the mistakes of those who did. And any public policy that rewards greed and excess, while punishing prudence and thrift, can’t be a good thing.
