Clinton’s Subpar Subprime Plan
February 5th, 2008 by Peter SudermanThe New Republic has just published a very strong article opposing Hillary Clinton’s proposal to address anxieties in the subprime market by freezing the initial, low teaser rates on adjustable rate mortgages, calling it “disastrous” and “a blunt tool applied too broadly to problems that are, in principle, contained and specific.”
As with most offers that look too good to be true, this one comes with many problems.
The first is its enormous scope. The plan is essentially to repudiate, revoke, or compel the revision of millions of contracts. There are approximately eleven million mortgages in America with adjustable rates, with a total value of more than $2 trillion dollars–a lot of money, even by Washington standards. Even restricting the plan to the 3.4 million subprime ARM loans (roughly $700 billion) would require an intervention of massive scale.
An even more serious problem with Hillary’s proposal is the nature of the solution it proposes. When someone takes out a loan with a low, so-called “teaser rate” that is scheduled to increase in a couple years, the investors who put up the money for that loan are counting on at least some of the borrowers to hold on to their mortgage long enough to start paying the higher rates. Without the promise of this increase, the initial rate would have had to be much higher. As economists like to say, there is no such thing as a free lunch. What would happen if scheduled rate increases were halted? Although it might make some borrowers happy, such a freeze could potentially poison the mortgage market and quickly exacerbate the slump in housing prices. If lenders and investors do not receive the interest payments they expected, they will be wary going forward.
The piece finishes by announcing that “Senator Clinton’s policy amounts to a command-and-control approach to economic policy in which the government announces prices and tells suppliers what to produce.” It’s a pretty clear indictment of her proposal, which, as Reihan Salam said on a recent edition of Bloggingheads, basically amounts to reinstating wage and price controls.
I think there’s room to disagree with the piece, however, in that it allows that some sort of subprime “fix” might be necessary for a very small number of ailing subprime borrowers. Specifically, it suggests that there ought to be “concern” for borrowers “led into loans they did not understand.” To a certain extent, I’d agree. Anyone losing a home deserves sympathy. And if lenders made fraudulent claims, or did not follow disclosure laws during the lending process, they should certainly be prosecuted.
But how much responsibility do taxpayers really have for those lenders who simply made poor decisions? For those who wanted a home they couldn’t afford and didn’t bother to read the paperwork or make reasonable estimates of their ability to pay? Mortgages are complex things, but doesn’t a borrower have some responsibility understand it themselves—or face the consequences? If we chose to abate those consequences, what sort of message would we be sending to those who chose to do the math, get smaller mortgages than they wanted in order to ensure they could pay them? I have sympathy for anyone losing a home in any circumstance, but that sympathy shouldn’t necessarily entail public assistance.
For more FreedomWorks subprime, see Dick Armey’s op-ed in IBD.
February 5th, 2008 at 12:31 pm
I am surprised that Mr Suderman actually agrees that a fix is required for a small number of borrowers, shocked should be the right word. However I disagree in this case.
The most important thing here is: the value of a contract. Capitalism is built upon a simple concept, that contracts tend to be honored more frequently than not. If the goverment steps in and removes a big chunk of the certainty factor, then we will be in trouble for a long time and future borrowers will pay the price of such mistake.
The second issue here is that the subprime mess affects both sides of the contract (the lender and the borrower). The homeowner will surely be without a home at some point, and the lender will be out of a sizeable amount of money that will be very hard to recover. But, this was a private deal, and no matter how “creative” some of the mortgages were, people freely signed them, if every time a party to a transaction makes a mistake we cry for goverment help, then we are screwed.
No matter how cold hearted sounds, the subprime mess should be left alone, and the market should be allowed to heal by itself. If that requires that old and powerful banks take a big financial hit so be it, if CEO’s, CFO’s and analysts need to be fired, so be it. If some “naive” guys lose their half a million dollars homes they can’t afford in the first place, so be it.
Let the market alone! hopefully all of the idiots on both sides will learn a lesson. Both the greedy mortgage lenders that tought they discovered the new “gold” of the market, and also the naive guys that thought they could buy a home way beyond their means.
February 5th, 2008 at 12:34 pm
Addedum, just to be clear, if fraudulent activity on behalf of the lenders is discovered, then stiff penalties and punishment should be applied for those cases.
February 5th, 2008 at 12:49 pm
Leonardo, if you can find where I said I supported a fix, I’d like to see it. What I said was I’d agree to an extent with their statement that there ought to be “concern” for borrowers “led into loans they did not understand.” The part I agree with is that there should be some concern, and that sympathy is appropriate. But I don’t think any legislative fix is necessary.
I agree entirely that freedom of contract is what’s at stake here, and legislation breaking private, freely negotiated contracts is always potentially dangerous.
February 5th, 2008 at 1:50 pm
Well the only important thing to read about my opening paragraph was the surprise for the concern for certain ailing borrowers, in particular coming from a cold blooded free market advocate (everything was supposed to be a joke, I guess it did not work). I worded it that way because of the following line:
I think there’s room to disagree with the piece, however, in that it allows that some sort of subprime “fix” might be necessary for a very small number of ailing subprime borrowers.
I failed to interpret the quotes around “fix” in a better way. However, it is good to see we do agree on the important points. If only we could agree on more (like flat taxes and non-earned income).
February 5th, 2008 at 7:03 pm
Right…we can’t let the banks not get their “lunch” by jacking up the interest rates on people’s homes. Both the Federal Reserve and the federal govt. pushed these ARMs hard ealier this decade…so, I think, they have to shoulder some of the blame and the burden to help fix the situation. We can’t just let a huge number of homeowners and banks go under and say, “Oh well, better luck next time…” I got your joke Leonardo BTW.
February 7th, 2008 at 7:56 pm
Obama’s Dirty Trick on Internet
Dear Sisters and Brothers for Hillary,
It is important, I think, to counter what is being said about Hillary and Chelsea on one very nasty pro-Obama website I came across, http://www.matrix-evolutions.com. They are connecting up Bill’s thing with Monica Lewinsky with a hint of parental sexual abuse on Chelsea, if you can believe it! Quickly, I think, shouldn’t something should be done before it blows up in Hillary’s face as an “Internet rumor?”
Onward to victory,
Alicia Silverstone
February 7th, 2008 at 9:23 pm
The above is spam…
March 27th, 2008 at 9:40 pm
fuerteventura golfing holiday…
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