Butt Out of the Mortgage Crisis

Larry Elder -

The problems faced by lenders and borrowers in the current subprime mortgage "crisis" do not merit a taxpayer-funded bailout. In fact, as many experts have noted, the best thing the government can do is butt out.

Our catastrophe-obsessed traditional media calls it the subprime mortgage “crisis” or “meltdown.” Here’s what happened:

Borrowers with shaky creditworthiness received low interest “teaser” rates. No problem, as long as housing prices continue to rise.

But with house prices stagnating, if not declining, this places some borrowers and the holders of their “paper” on financial shaky ground.

In other words, lenders lent and borrowers borrowed. Some borrowers took on debt only to find themselves unable to pay their mortgages, and the carriers of their debt now find their holdings less valuable.

But what about the responsibility of both lender and borrower? The Media Research Center examined news coverage of the subprime “crisis.” Of 156 stories broadcast between November 2006 and August 2007, 62 percent “ignored the consumer’s responsibility for debt.”

No one put a gun to either lenders’ or borrowers’ heads, and now both sides of the transaction find themselves in financial difficulty. Lawmakers scream for more laws. Never mind that lenders already operate under many regulations including, but not limited to, full disclosure requirements.

Democrats, and many Republicans, cry for some sort of government (read “taxpayer”) bailout. A New York Times editorial demands legislation, “including a rule that lenders must verify a borrower’s ability to pay”!?

House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.) seek legislation to make Federal Housing Authority “loans more widely available in order to help both new homeowners and those struggling with abusive mortgages.”

They also demanded that President Bush fund nonprofit foreclosure prevention counseling, and appoint a senior administration official to oversee federal response to the “crisis.”

Instead, the President has offered a sort of middle ground, suggesting a five-year freeze on mortgage rates for some subprime borrowers facing default on their mortgages.

Suppose you stayed on the sideline and rented or stayed in a smaller home in order to move up? Too bad, for the Bush plan artificially props up home prices.

The President’s plan also enables some homeowners to receive Federal Housing Authority loans in which the government — taxpayers — pay lenders in the event of a default. The plan also does nothing to prevent lawsuits by investors who hold the mortgaged securities in expectation of a certain return.

George Mason University economist Tyler Cowen says, “We’ve all heard about the defaults on subprime mortgage loans. But so far, the real story is how little the broader American economy has suffered. ...

“Today, banks usually sell their loans to third parties. ... You might have originally borrowed money from Wells Fargo, but now a bank overseas cashes your mortgage checks.

“If a large group of people can’t pay their mortgages, they may lose their homes. But the banks don’t suffer as they used to — local American lenders have already converted those loans into cash and sold off their risk. In fact, German regional banks suffered some of the most significant losses from bad American mortgages.

“Other European and Asian banks and hedge funds took their lumps as well. American banks essentially bought insurance by exporting their risk overseas.”

Let’s not minimize the trouble faced by thinly collateralized borrowers and their lenders, given the soft housing market. But the financial difficulties affecting both sides of transactions voluntarily entered into do not warrant a taxpayer bailout.

U.S. homeowners’ equity today equals almost $11 trillion. Price declines for this year and next year may amount to $6 billion, or a 0.05 percent decline — a worry, but hardly Judgment Day.

Christopher Cagan, of First American Real Estate Solutions, estimates that “the impact of rate sensitivity and subsequent defaults will be … well below one-half percent of total mortgage debt outstanding” and spread out over several years.

Donald Trump, who knows a bit about crisis management, having dealt with his own financial “meltdown,” suggested a simple, direct approach: Cut a deal with your lender.

Similarly, Treasury Secretary Henry Paulson has already urged banks and borrowers to get together and renegotiate the terms of their loans.

So what would a bailout say to those who avoided the subprime lending fervor? The Wall Street Journal reports that — unlike Citigroup and Merrill Lynch — Goldman Sachs “maintain(ed) relatively small holdings of collateralized debt obligations, or CDOs, the complex mortgage-related securities whose rapid devaluation prompted the massive writ-downs at other firms.”

Should government reward the shortsighted losers and, by extension, punish firms such as Goldman Sachs and Lehman Brothers that had the foresight to protect themselves?

People in the insurance business use a term called “moral hazard.” This means actions, however well-intended, that shield people from the consequences of their behavior lead to even more irresponsible behavior. Secretary Paulson recently said, “I have no interest in bailing out lenders or property speculators.”

OK, then butt out!

Christmas Books

by Thomas Sowell -

Still looking for a few Christmas gifts? Here are some excellent books published this year that are well-written, enjoyable to read, and guaranteed to provide a perspective you don't hear often.

Books are good gifts to receive and even better gifts to give because you can get books without half the hassles involved in buying many other kinds of gifts. You can easily buy books from the Internet and avoid the mob scenes at the shopping malls.

This has been a good year for books that shoot down false and nonsensical notions on major issues of our time.

The Immigration Solution by Heather Mac Donald, Steve Malanga, and Victor Davis Hanson

The Immigration Solution is an excellent new book that discusses illegal immigration without the political rhetoric, spin, demagoguery, and unsubstantiated claims that have become all too common in the media and among politicians.

It was written by three scholars at leading think tanks — Heather Mac Donald and Steve Malanga of the Manhattan Institute and Victor Davis Hanson of the Hoover Institution at Stanford University. Unlike many other scholars, they know how to write so that the general public can understand what they are saying.

Mugged by Reality by John Agresto (discussed in more detail here) is an eyewitness account of life inside Iraq by someone who does not take either the Bush administration line or the Congressional Democrats’ line. Nor does he hesitate to admit that what he saw in Iraq changed the opinions with which he first entered the country.

It is a sobering and insightful account of what has happened and of the problems with various alternative courses of action. It is one of those books that adds a new dimension to your understanding, whether you agree or disagree with the author.

The Prince of Darkness by Robert Novak is a big book detailing half a century of his experiences in Washington, dealing with both political figures and other members of the print and broadcast media. He names names.

This book should be especially valuable to those young people who have been brainwashed with the notion that it is somehow nobler to be in “public service” than in the private sector.

The Forgotten Man by Amity Shlaes

For those who like history, there is a new history of one of the most decisive decades in American history — the decade of the Great Depression of the 1930s — titled The Forgotten Man by Amity Shlaes.

It tells a revealing story of the people and the policies that shaped that decade, as that decade has shaped much of what has happened with government intervention in the economy ever since then.

For those who want more in-depth analysis of the economic consequences of New Deal policies, Jim Powell’s book FDR’s Folly would make an excellent supplement to Amity Shlaes’ book.

Until Proven Innocent by Stuart Taylor and K.C. Johnson is an account of the Duke University “rape” case that goes far beyond the misdeeds of the disgraced District Attorney Michael Nifong.

Until Proven Innocent by Stuart Taylor and K.C. Johnson

Until Proven Innocent turns over a lot of rocks and shows what was crawling underneath — in the media and in academia, as well as in law enforcement, that produced a lynch mob atmosphere in which evidence meant nothing.

Because Duke University is by no means unique in the attitudes of its faculty and administration, what happened at Duke could happen at any number of prestigious universities around the country. It is something to think about for those who have their hearts set on getting into Prestige U.

An excellent present for those parents and students who want to find academic institutions that have not succumbed to the ideological corruption found at Duke and other colleges and universities would be the book Choosing the Right College.

My Grandfather's Son, a memoir by Clarence Thomas

The latest edition, just published, is over a thousand pages long and goes into the campus atmosphere at numerous colleges and universities, in addition to dealing with academic questions, such as the presence or absence of a curriculum.

A very moving account of the life of Supreme Court Justice Clarence Thomas can be found in his very readable and insightful memoir, My Grandfather’s Son, which has been on the best-seller list for eight weeks thus far.

(More background here on Thomas and his memoir.)

In these politically correct times, we are only supposed to say “happy holidays,” lest we offend someone by being politically incorrect, but I wish you all a Merry Christmas and a Happy New Year!