Last Friday evening the U.S. Senate voted 93 to 1 to make it easier for homeowners with subprime loans to move to federally insured loans. The one “nay” vote was cast by our own Senator Kyl. I whole heartedly agree with his vote. If passed into law, this bill will be another taxpayer bailout; this time of mortgage lenders who made loans that should not have been made.
The bill essentially shifts the financial risk from the borrower and lender to the federal government by loosening the credit requirements on FHA loans. As the Honorable Tom Patterson recently wrote, “Worse, the bailouts reinforce Americans' belief that the consequences of risky behavior should be borne by government. We can live in floodplains, go without medical insurance, or take on more debt that we can afford, knowing that if it doesn't work out, government will rescue us.”
I would hope most Republicans would be smart enough to reject the premise that these “loans” were made by predatory mortgage lenders interested in defrauding borrowers and forcing them to default so they could repossess their houses. Senator Charles Schumer of New York would have you believe these borrowers were “tricked” into unaffordable loans. Hey Chuck, lenders are not in the home ownership business.
No doubt, some mortgage originators were greedy and anxious to generate fees by writing subprime loans that could later be packaged into mortgage backed securities and sold off in the securities market. In total, these subprime loans represent only a very minute percentage of all the loans written during the housing boom.
Lenders who created the situation by issuing easy credit should be working with borrowers to resolve the problem and not looking to government to fix their problem. Many lenders have already or are in the process of implementing programs to do just that. As we have learned before, the government should let the free market work. President Reagan had it right when he said, “Government does not solve problems; it subsidizes them.”