With the housing mess threatening to send the economy into a tailspin, politicians are scrambling to come up with a quick fix. Senate leaders this week announced they've come up with a housing bailout bill, including a $4 billion grant to local governments to buy foreclosed homes, authority for states to issue bonds for refinancing sub-prime mortgages, and a $7,000 tax credit for those buying new homes or existing houses in foreclosure. The bipartisan compromise package will cost taxpayers plenty but does little to alleviate the real problem. That's because politicians are scared to death to put the blame where it belongs.
Everyone is willing to cry foul about the unscrupulous lenders who suckered borrowers into sub-prime loans that ballooned after a couple of years, making payments unaffordable for many. But what about borrowers who behaved irresponsibly in the first place? The fact is, Americans have been living beyond their means for years, and now the bill has come due. As usual, we expect someone else to pay it.
Borrowers have gotten in trouble because they bought houses they couldn't afford, often with little or no down payment, and accepted loans that sounded too good to be true -- and were. Banks used to tell prospective homeowners that they could qualify for a loan on a home that was roughly three times their yearly salary. Banks also required 20 percent down. So, if a family earned $75,000 a year, they could buy a $225,000 house, but they had to have saved $45,000 to put towards the house in order to qualify.
But at the height of the housing boom, some lenders were willing to lend borrowers five -- even 10 -- times their annual salary. And if the borrower didn't have the down payment, the lender would finance some or all of it, too, with a home equity loan. Even the closing costs on the sale -- amounting to thousands of dollars -- could be worked into the loan. In order to keep the payments within reach, lenders set very low interest rates for the first few years on adjustable rate mortgages, which then went up sharply. And those most likely to sign up for such loans were the buyers with the worst credit histories, who couldn't qualify for more traditional mortgages.
Economists and others warned of a housing bubble about to burst, but builders kept building -- even when their new houses were sitting unoccupied for longer and longer periods. And existing homeowners refinanced their homes, taking out their rapidly inflating equity to buy new cars, furniture or vacations.
Linda Chavez is chairman of the Center for Equal Opportunity and author of Betrayal: How Union Bosses Shake Down Their Members and Corrupt American Politics .
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