Don't Waste Your Time If You Can't Pay the Prime
by Deneen Borelli (bio)
It was the American Dream on steroids.
Mortgages were offered at low initial interest rates without down payments. Many were helped to purchase homes for the first time. Others bought second homes and investment properties. Still more refinanced existing mortgages, subsidized home improvements and - at times - extravagances.
Then, like all unnatural highs, a bad turn of events created a nightmare for thousands of homeowners and their lenders.
Many homeowners began feeling the squeeze when rising interest rates triggered a dramatic rise in monthly payments on loans with variable rates. Foreclosure has too often been the result.
Liberal activists are using this "foreclosure crisis" to stoke class warfare, demanding government intervention to bail out overburdened homeowners. While it is noble to help those in need, the activists ignore the principle that people should be responsible for their decisions.
For example, Jesse Jackson and his Rainbow PUSH Coalition, the NAACP and the National Training and Information Center (NTIC) seem to be using this crisis to advance their political agenda. Masters of the victimization game, they blame failing mortgage loans on the financial industry, saying lenders took advantage of hapless victims. These groups and others recently marched on Wall Street to proclaim this message, and the NTIC's Save the American Dream coalition sent letters late last year to the top five U.S. investment banks - Bear Stearns, Morgan Stanley, Lehman Brothers, Merrill Lynch and Goldman Sachs -demanding executives "pledge this year's bonuses to a national foreclosure prevention fund that will provide immediate relief to homeowners in danger of foreclosure."
Pitting lenders against borrowers is only part of the liberals' strategy. Not surprisingly, next came the call for federal intervention. Every crisis in the liberal world naturally necessitates a new government program.
The Center for American Progress, headed by former Clinton Administration chief of staff John Podesta, proposed that the government establish yet another agency, to be called the Family Foreclosure Rescue Corporation, that would purchase existing non-performing mortgages (at a discount!) with taxpayer money, offer mortgage holders corporate bonds and issue new fixed-rate mortgages to borrowers in jeopardy.
They need not lobby too hard as some lawmakers are already fervently promoting their agenda. One piece of proposed legislation seeks to grant bankruptcy judges authority to revise specific terms for troubled mortgages. Also under consideration is the "Federal Home Administration Modernization Act," which would allow the FHA to acquire subprime mortgages and offer fixed rates of approximately six percent.
Missing from all this discourse, however, is talk of the consequences of such government action.
Allowing judges to rewrite mortgage contracts would add significant risk to lenders and would discourage new loans to those with lower incomes. Already suffering their own significant financial losses, banks would be especially leery of granting new, potentially risky loans if the terms could be altered by a third party. The mortgage industry is already tightening its lending standards by increasing fees and surcharges and demanding higher credit scores and down payments.
Foreclosure is never a desired outcome, but the mortgage crisis was not just about lenders taking advantage of borrowers. They fed off each other. Many people bought more than they could afford. While the American Dream was previously achieved through hard work and saving, interest-only loans and adjustable-rate mortgages allowed people to end run it.
Lenders suffer too. Citigroup, for example, posted its worst quarterly losses ever - losing almost $10 billion, laying off 4,200 employees and shorting investor dividends. At-risk borrowers, on the other hand, may get a taxpayer bailout. After setting this precedent, when will the government be asked to cover bad car loans?
Government aid should never remove the burden on citizens to exercise good judgment.
Personal responsibility is the key to fulfilling one's wants, needs and independence. An understanding of the risks and rewards of contracts is the best way to avoid the temptation of overextending personal financial obligations.
Frederic Bastiat, the noted political theorist, wrote in "The Law": "Man can live and satisfy his wants only by ceaseless labor; by the ceaseless application of his faculties to natural resources. This process is the origin of property." Handing over this fundamental responsibility to the federal government would take us another step closer to statism.
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Deneen Borelli is a fellow with the Project 21 black leadership network. Comments may be sent to [email protected].
Published by The National Center for Public Policy Research. Reprints
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