Oct 17 2007 6:20AM | Permalink | Email this | Comments (2) |
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Proposals to cushion the consequences of the housing collapse on financially distressed homeowners have moved to the top of the policy debate in Congress and many state legislatures. Some of the proposals excuse the mistakes that caused the problem, making it likely to happen again. Compassionate assistance to families at risk of losing their homes and much of their net worth needs to be designed without institutionalizing a high risk of a similar housing collapse in the future.

Public officials are demanding that large financial institutions “voluntarily” provide funds to forgive mortgage debts, lower mortgage rates and refinance bad credit risks. Isn’t this how the problem began in the 1990s? Public officials demanded that lenders offer mortgages to people with bad credit, insufficient or insecure income and little, if any, downpayment.

Lenders that balked were threatened with more regulation and lawsuits claiming discriminatory lending. As we now know, lenders quickly realized that the government was paying so little attention to the details of the mortgage process that big profits could be made making loans to bad credit risks and relying on rapidly rising home prices to permit borrowers to refinance and become another lenders’ risk.

Barney Frank (D-MA), the chairman of the House Finance Committee, has summoned major lenders to tell him what voluntary actions they will take and has threatened them with more regulation if they do not offer enough voluntarily. Deval Patrick, the Governor of Massachusetts, has his staff calling on lenders to make the same demands.

This approach demonizes lenders and excuses any mistakes made by borrowers. It signals borrowers that they are entitled to be relieved of their debts. They were defrauded by dishonest lenders. They did nothing wrong and can do it again.

Certainty, there were dishonest lenders. But there were also dishonest borrowers. Some lied about their income or other debts on their application. Some speculative buyers lied about their intentions to live in a house they bought. Some simply found teaser rate mortgages with no downpayment cheaper than rent . They never intended to make payments for thirty years. Many others were too greedy. They bought more house than they could afford.

The list of households unable to meet mortgage payments includes the usual several hundred thousand whose tight budgets were disrupted by illness, job loss or divorce. These are the people whose problems you will read about. It is easier to be sympathetic to them than to people who signed loans they should have known that they could never pay unless they won the lottery.

The only solution that does not reimburse losses from fraud and overreaching is to provide mortgage assistance only to people who live in the mortgaged house and have or once had a significant amount of equity.