Taking Credit
August 25, 2007; Page A6
Mortgage markets have looked like ships lost at sea of late, so of course Presidential hopefuls Hillary Clinton and Chris Dodd have dinged George Bush for not launching the lifeboats.
Senator Dodd finds it "troubling that President Bush is sitting by idly while millions of Americans face foreclosure on their homes." Mrs. Clinton has proposed a bailout fund for homeowners facing foreclosure and a program of punitive regulation for whichever mortgage lenders and brokers manage to survive the shake-out.
Everyone on the Democratic side of the aisle seems to think the President should send in Fannie Mae and Freddie Mac to make everything right again. Meanwhile, at least a dozen states have rushed in to heighten underwriting standards and forbid "above market" interest rates and other bad practices. One safe harbor: Congress is on vacation.
Amid the torrent, we found one voice of comparative reason this week: Congressman (and Chairman of the House Financial Services Committee) Barney Frank. Yes, Mr. Frank also would like to see his friends Fannie and Freddie loosed on the mortgage-backed securities market. But he deserves credit for speaking an awkward and politically unpopular truth: We got into this mess because some people bought homes who had no business buying the homes they did, and maybe no business buying a home at all.
One can differ with Mr. Frank about exactly how that came to pass or the appropriate response. But identifying a problem accurately is the first step to solving it. Strip away the rhetoric and you're left with this: If no one had loaned marginal buyers the money to buy a house, they would never have owned the home they are now in danger of losing. Since many of those marginal buyers put little or no money down, they will return to the rental market, little worse off than when they left it.
That may seem harsh but consider: At the state level, many of the "reforms" being rushed through legislatures will have the effect of making sure that people now in danger of losing their homes won't get a second chance to take out a mortgage they can't pay back.
Requiring underwriters to qualify borrowers at their "full" interest rate, rather than the teaser rate they might have been offered for the first couple of years, means many of those borrowers won't qualify for the loan in the first place. Well and good, you might say, if that means they won't get a mortgage they can't afford over the long term. But then it makes no sense to argue that the federal government needs to keep these people in their homes. Likewise, passing laws against "above-market" interest rates is another way of saying that if you are a risky credit, it would be better not to lend to you at all.
To state what up to now apparently wasn't obvious, subprime loans are riskier than prime mortgages with conservative loan-to-value ratios. The higher interest rate was intended, in theory at least, to compensate lenders for taking on that higher risk. Forbidding them to charge more for riskier loans is tantamount to barring them from making those loans in the first place.
Whatever Congress decides to do when it returns, some of these problems are fixing themselves. Lenders seem to have figured out that it's dangerous to lend to someone who can't afford the interest rate that kicks in when the teaser period ends, especially if the borrower never has to document his income or assets. And the myth that an ever-rising housing market would bail out even dubious loans has, we suspect, been debunked.
If Congress really wants to "do something," it might start by trying to understand the problem. As of the end of this year's first quarter, according to former Federal Housing Commissioner John C. Weicher, some of the highest delinquency and foreclosure rates were in the upper Midwest. Indiana, Michigan and Ohio never experienced the boom. Those three states each saw less than 5% annual house-price appreciation the past five years, about half the national average. By contrast, the hottest housing markets in that period -- in Florida, the Northeast and the West -- still sport comparatively low foreclosure and delinquency rates.
That could shift as adjustable rate loans made in 2005 and 2006 reset at higher rates. But it suggests that a robust state economy is good insurance against a housing bust. Adopting pro-growth economic reforms to add jobs and businesses looks like the best answer to an ailing housing market. Trying to correct lending and underwriting mistakes that won't return for years -- while shooting the wounded in the capital markets -- smacks of fighting the last war. Congress should avoid that mistake. |
