PROVIDENCE, R.I. — Line up the suckers.
The mortgage meltdown has produced many victims. The most sympathetic are the low-income folks who are losing their homes to foreclosure. Some Democrats want to help many of these unfortunate souls by having government refinance their loans. Ohio has led several other states in starting such programs.
It’s a bighearted response, but not a good idea. Saddling the public with troubled loans simply adds taxpayers to the sucker list — and bails out the lenders who should be left to fry.
Democratic emotions would be better spent pointing fingers at Republicans who refused to regulate the fast-buck artists pushing nasty loans on an unsophisticated public. House Financial Services Committee Chairman Barney Frank is threatening to emasculate the Federal Reserve if it doesn’t set humane rules for mortgage lenders. That’s the way to go.
Former Fed board member Edward Gramlich says that several years ago he had urged then-Chairman Alan Greenspan to rein in the subprime lenders. Greenspan contends he doesn’t remember that talk, and in any case, regulating the assortment of mortgage lenders would have been too much trouble.
Greenspan wasn’t called “the great anti-regulator” for nothing. And his refusal to contain the housing bubble served the interests of the Bush administration. The bubble created a fantasy of well-being among the middle class. Soaring home prices made ordinary Americans forget about their stagnant paychecks. They were getting richer, on paper, anyway. And they could borrow more money off their growing home equity and spend it on Hawaiian getaways, fancy wheels and personal finery — just like the CEOs.
Borrowing and spending — whether public or private — has always been a cornerstone of the Bush economy. The credit-fueled housing boom spawned construction jobs, filled the malls and, as noted, made the middle class think it was doing better than it was.
In the bubble mentality, prices only go up. That and EZ credit encouraged otherwise prudent Americans to borrow more money to buy bigger houses, which itself further goosed real estate prices.
Low-income people with poor credit records got dragged into the madness. Lenders hook these less-than-prime borrowers with very low come-on interest rates. Later on, the rates balloon, sometimes doubling the monthly payments. Attached to these subprime mortgages are a variety of fees and penalties that naïve consumers barely understand.
It was only a matter of time before the higher interest rates kicked in and subprime borrowers foundered. But even well-to-do people had taken on adjustable-rate mortgages (big ones), and many of them went into shock when monthly payments suddenly exploded. Countrywide Financial, a huge mortgage company, recently announced that these “low-risk” borrowers are also falling behind. Stock markets swooned upon hearing that news.
Guess it’s time to start regulating.
“The Fed has the authority to spell out rules about what is fair and deceptive,” said Frank, a Massachusetts Democrat. “If by default the Fed is not in the process of doing it, we, I think, should pass a law giving the authority” to other government agencies.
Fed Chairman Ben Bernanke seems to have gotten the message. He has promised a pilot program to better supervise subprime lenders, including those that have traditionally escaped federal oversight.
Where there was mortgage fraud, government can obtain justice for the victims by seeking penalties and jail time. Many lenders had tricked black and Latino borrowers with good credit into taking expensive subprime mortgages. The NAACP is suing some of them. Good.
But government must not get into the business of bailing out people who can’t handle their debt, even if they’re poor. Burdening the public with bad loans is unwise policy. The taxpayers should not become suckers-of-last-resort.
Froma Harrop is a member of the Providence (R.I.) Journal editorial board and a Creators Syndicate columnist.