Congress and the Mortgage Madness: Leave Things A-Loan

Posted: Apr 17, 2008 12:01 AM
Congress and the Mortgage Madness: Leave Things A-Loan

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.”

What’s needed, Foster says, is a “light touch” to help the natural correction that’s occurring unfold more quickly. A good example is the Hope Now program. Launched by The Treasury Department and Department of Housing and Urban Development in October 2007, Hope Now is a voluntary alliance of investors, counselors and other mortgage market participants working to keep credit-worthy borrowers in their homes. With its help, the mortgage industry is working to keep 160,000 families a month in their homes by modifying their loans or revising their payment plans.

In the interest of fairness, and for the sake of our economy, we can’t resort to blanket, indiscriminate bailouts. Take the proposal by Sen. Johnny Isakson, R-Ga. He wants to provide a one-time, $15,000 tax credit to they buyers of either a newly constructed home or one that is in foreclosure or default. But as Heritage’s own David John points out, this subsidy would reward homeowners at any income level who either borrowed all of their home equity or took on a loan they couldn’t repay. It also would help homebuilders who ignored signs that the market was slowing and built homes that shouldn’t have gone up in the first place.

There are things Congress should -- and shouldn’t do -- on this issue. In a recent “Heritage in Focus” video, former Congressman Ernest Istook, a Heritage visiting fellow, lays out “Five Standards for Solving the Mortgage Madness.”

Besides, where would the bailout bonanza end? As Istook puts it:

“If Congress bails out those who borrowed too much for a home -- or who pulled out too much equity -- then what’s next? How about those who spent too much for a car? Or a home theater system? Or who bought stocks that went down instead of buying stocks that went up? … Government can’t guarantee success -- and it destroys character when it tries. And a government big enough to give you everything you want will do it by taking everything you’ve got.”

Our Founding Fathers understood the importance of individual liberty and individual responsibility. And if you lied to get a loan you couldn’t afford when the market was riding high, you have no business running to your government crying when the market tanks and it’s time to pay your bills.

Congress shouldn’t meddle. It needs to avoid the temptation to “do something” -- and let the market correct itself.