Buying a house is the biggest financial decision that most people ever make. Homeownership isn't always easy, but most buyers are responsible.
The few who aren't should pay for their own mistakes. Government shouldn't bail them out, as Gov. Deval Patrick wants to do. He certainly shouldn't be able to do so on his own authority, without legislative review.
It was long difficult to get a mortgage if you had bad credit. But that changed in the last few years.
A new market in "subprime" lending developed. As housing prices rocketed upward, banks were willing to provide mortgages to even marginal borrowers since the home could always be refinanced or sold, if necessary. Some people bought who should have rented, or bought bigger houses than they normally could afford.
Investors looking for a little extra return poured money into subprime mortgages, many of which were bundled together into "collateralized debt obligations." Some $320 billion worth of CDOs were issued last year alone, and were snapped up by mutual and hedge funds alike.
The slowdown in real estate prices has brought the party to a sharp halt. People are poor credit risks for a reason, and many have been defaulting on their mortgages. Homes are being foreclosed, lenders are going under, and investors are losing money.
It's the way that capitalism is supposed to work. Taking a risk means accepting a chance that things will go bad, and paying the price if they do. The process is painful, but it forces everyone to be more careful before buying a home, making a loan, or investing money.
Unfortunately, Gov. Patrick plans on short-circuiting this important adjustment process. Every elected official is tempted to save people from themselves. But doing so is likely to create more harm and hurt more people over the long-term.
Home foreclosures, loan defaults, and investment losses are national phenomena, but Gov. Patrick is proposing a $250 million fund to bail out Massachusetts borrowers in danger of losing their homes. The state would provide new loans to bad credit risks. Unlike the first mortgage, when investors voluntarily risked their money, taxpayers would have no choice about getting into the costly subprime market.
Gov. Patrick points to endangered homeowners, with whom we all naturally sympathize, but his proposal would bail out everyone, including lenders and investors. Yet these sophisticated businessmen knowingly accepted the extra risk in order to collect a higher profit.
Ray Haynes served in the California Legislature from 1992-2006 as a Senator and Assemblyman, and was the National Chair of the American Legislative Exchange Council in 2000.
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