Americans are a compassionate people. Faced with media reports about the rising tide of foreclosures, it’s understandable that many feel tempted to applaud federal action -- to agree that politicians should “do something” to help people stay in their homes.
Should the government try and come to the rescue? Go to The Heritage Foundation’s “What Would Reagan Do?” Web site and take our quiz to see if you know what President Reagan (who took us from double-digit mortgage rates to a booming economy) taught us about government bailouts.
As bad as things are, the wrong kind of congressional action could make things worse -- and reward dishonest borrowers at the expense of hard-working Americans who did nothing wrong.
Many of today’s problem mortgages were taken out by people who filed false applications. “Many of the frauds were simple rather than ingenious,” George Mason University economist Tyler Cowen wrote in an op-ed for The New York Times. “In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers.”
Yet if certain liberal politicians get their way, these people will get a break. And honest borrowers will get stuck with the bill.
The mortgage madness came about because lending standards were loosened in the mid-1990s. Boosting home ownership -- which, generally speaking, is a good thing -- became a mantra to justify making “subprime” loans to people with shaky credit who never would have qualified under the old rules. Once the number of defaults began rising in 2006, it was only a matter of time before the pain spread to other parts of the economy.
Yes, there’s a lot of turmoil out there. But the market has already been reacting to fix the problem. Home prices that soared to ludicrous levels during the housing bubble are sliding back to reality. Lenders have been tightening standards so they make loans only to those who can actually afford them.
It’s a painful process, to be sure. However, “there is no safe or prudent way to short-circuit the process by which assets find their new, lower and proper values based on economic fundamentals,” Heritage expert J.D. Foster notes in a recent paper. “The sole role of government in this process is to ensure that markets are functioning, that full and accurate information is available, and that contracts are honored.”