Yesterday's WSJ featured a call to arms by the Rev. Jesse Jackson regarding the unfolding crisis in subprime mortgages. He proposes a Marshall Plan for homeowners facing foreclosure on such mortgages when their interest rates balloon on January 1. He does cite Bush's plan to freeze home-loan rates for 5 years, but says it doesn't go far enough to help borrowers. He proposes creating an independent government agency akin to Roosevelt's Reconstruction Finance Corporation to provide money to state and local governments to bail out homeowners, just as we bailed out the S&L's in the 1990s.
There is little doubt that the administration must act--and act strongly--to avert what can easily turn into a worldwide financial crisis heretofore unseen since the 1930s. The 5-year freeze begins that effort. I get that. But is bailing out every single person who took out a subprime mortgage the answer?
(From the AP):
Under the new plan, lenders can help homeowners by:
# Refinancing an existing loan into a new private mortgage
# Moving them into an FHASecure loan
# Freezing their current interest rates for five years
# Must live in their home
# Loan originated Jan. 1, 2005 to July 31, 2007
# Missed no more than one payment
# 3 percent or less equity
# Credit score of 660 or less
# For more information, call 888-995-HOPE.
Some market leaders say this is a terrible plan because it gets the government involved where it should not be. Others, like the Reverend Jackson, say that it does not go far enough to cover all homeowners. Henry Paulson, Secretary of the Treasury, said this: "Some borrowers, particularly those who received loans under the most lax underwriting standards and who haven't even been able to make their initial payments, likely will become renters again." Jackson finds that view objectionable. But, again, is the job of the government to financially rescue individuals who have not met the criteria outlined above, such as missing no more than one payment? Certainly, subprime loans' shadiness lay in the fine print, that payments would double after a certain number of months. But if you take out a mortgage on which you cannot even make payments for the first year or two at the artificially low interest rate, that strikes me as a personal choice to live above your means. Any assistance should be directed at those individuals who are faithfully making payments, living in their homes, and genuinely caught between a rock and a hard place not of their own making. And that assistance ought not to come entirely from the government. Both lenders and borrowers share some blame for this mess. The borrowers are certainly suffering for their sins, and so should the lenders. Wholesale government bailouts "fix" the problem at hand in the short term, but long-term they simply encourage the kind of reckless financial practices that got us into this mess in the first place.