Am I the only liberal out there who thinks the various foreclosure fixes being thrown around in Washington are a really bad idea?

Yesterday Bush announced an agreement with the banking industry that would freeze the teaser rates on adjustable rate mortgages given out in the last couple of years to subprime borrowers. The freeze would apply for five years, and would be granted only to people who a) are current in their mortgages; b) can pay under the teaser rate but wouldn’t be able to pay when the mortgage adjusts higher. This would exclude anyone who’s already behind in payments and anyone deemed to make too much money to get relief.

The Democratic candidates are falling all over themselves to outdo each others’ and Bush’s proposals. Enough already!

Why is it bad to freeze rates and prevent people from losing their homes?

Because it relieves people from the consequences of their own bad decisions. Everyone who signs a contract has a responsibility to know what they’re signing. Ignorance is no excuse. Every real estate closing I’ve been to has the closing officer state the terms of the loan clearly to borrowers so that they know exactly what they’re signing. They always have the chance to get up and walk away, but they don’t.

They don’t walk away for a myriad reasons–everything from wanting to keep up with or exceed the Joneses to wanting to get a piece of the American dream. It had to be obvious to the janitor buying the McMansion that he couldn’t really afford that property, and that sooner or later his financial reckoning day would arrive. People of limited means don’t live in mansions for a reason–they can’t afford them.

People have to learn to live within their means and accept responsibility for their own choices, and having the “nanny state” swoop in and rescue people from really dumb real estate purchases flies in the face of that.

But didn’t the banks and investment companies encourage the real estate frenzy and even encourage fraud to sign people up for mortgages?

You betcha, and for that they need to pay. But how do you make a corporation pay? You hit them where it hurts–and that’s on their bottom lines. The reward they have gotten for all this ridiculous lending has been the tanking of their stock prices and drying up of their credit lines. The CEO’s of Morgan Stanley, Citigroup and Merrill Lynch have all been sacked in the last six weeks. These companies are in very serious trouble, and that’s exactly what they deserve.

The banks that made these loans and then sold them off to the enabling companies mentioned above are also being hurt–mortgage lending has almost dried up, and the credit crunch is making it very hard for them to stay in business. Plenty of punishment all around.

But no matter what the banks and hedge funds encouraged, it ultimately came down to each individual signing his or her name on the dotted line for a mortgage he knew or should have known he would eventually be unable to afford. They took a greedy gamble that they would probably sell the property in the future for much more money, and they lost the bet.

Why is interference in the foreclosure problem bad for the economy?

BECAUSE IT’S ONLY PROLONGING THE PAIN! The people who will benefit from the interest rate freeze in all likelihood will not be any more able to pay the increased interest rate 5 years from now than they will today. Five years from now, then, they will all try to do what they’re doing today–sell their properties. Instead of taking the pain all at once now, forcing people and especially builders to slash their prices to whatever amount is needed to regain balance in the market, we are drawing out the process far longer than it has to be. Instead of an extremely sharp real estate downturn that lasts three years and then recovers, we’re probably extending a not quite-so-severe downturn for up to a decade. Don’t be putting your money in real estate folks–it will probably go nowhere anytime soon.

Should the government do anything about this mess?

Yes–make sure it never happens again. How?

a) Manage the economy better, and never again lower interest rates like Greenspan did, which were so low that they started the frenzy of cheap lending.

b) Make sure all parties tell the truth–from making it a crime for a borrower to lie about his income, to banks making it crystal clear by how much the monthly payments will increase when loans re-adjust in the future, to the investment rating firms correctly marking mortgages as toxic waste instead of putting A++ labels on them and deceiving investment companies into buying them!

c) Keep the banks who make the loans accountable for losses on them–once upon a time, banks didn’t make stupid loans because they’d be stuck with them in the books if they went sour. But in recent years a new market opened up and they could now sell their mortgages to hedge funds and investment companies, thus losing all incentive to make sensible loans. They instead became incentivized to make as many loans as possible. The market may do this on its own, since the hedge funds seem to have suddenly lost their appetite for these mortgages–but either way the banks should somehow remain accountable.

At the end of the day, all parties involved–banks, investment companies, bond rating companies, the Fed, realtors, real estate appraisers, and individual borrowers–all colluded to create a mass delusion that real estate could only go up in price and was a 100% safe investment. They were wrong, just like they were all wrong about everything from dutch tulips to dot-com stocks.

Now, each and every one of them needs to take their harsh medicine to make sure that a debacle like this never, ever happens again. It’s time to return to personal accountability, where each individual and entity is responsible for his own mistakes and must accept the consequences. Otherwise, we create moral hazard by simply issuing an invitation to repeat history down the road–after all, if the government bails you out today for your screw ups or greed, it will probably do it again tomorrow–so why not just throw concern about risk out the window and do it all again someday?

That’s what happened to Japan–they kept bailing out bad loans until one day the music stopped when they realized the foolishness of throwing good money after bad, and they’re still stuck in a stagnant, deflating economy almost two decades after their real estate and stock bubbles popped.

Let’s stop pointing fingers to others for our own mistakes, and point them to ourselves. Let the excess wring itself out of the economy, get the whole debacle over with, and then move on to recovery as quickly as possible.

Tags: bush, economy, foreclosure, moral-hazard, mortgages