Mortgage Madness: What is Wrong with America?

Sometimes, with Louis Armstrong playing in the background, I think about the wonderful country we live in, where our leaders make good decisions, our citizens are free and brave, markets are free and the most deserving receive the greatest reward. God bless America.

Then I wake up... Ladies and gentlemen, our country is nuts. I didn't need any more evidence after I saw a gaggle of house "owners" outside of a Countrywide office protesting because they didn't want to or can't pay their debts. I am dumbstruck that a person who receives hundreds of thousands of dollars to buy something is painted as a victim when he/she doesn't pay the money back. And the lender is the bad guy because... gasp!... he wants to receive interest in an amount that would cover his expected losses. These people with crappy credit histories should feel fortunate to receive credit in the first place. Instead, they feel entitled to the same rates that us borrowers who actually pay our debts receive. This is absolute lunacy.

Note the sign that says "My life is not adjustable... stop adjustable rates." A few questions here: If that is the case, lady, why did you enter into an adjustable rate contract? Would you be protesting to give back all of the capital gains you got because the big bad lender gave you money if the housing market were still hot? Didn't you know your rate would reset and that could cost you money? How is it possible not to know what you are getting into when you enter into a financial obligation for an amount of money equal to 10 or 20 years your annual pay?

I'm willing to bet that most people knew what they were getting into and accepted the risk. When they found out how boneheaded their decision was, they wanted to back out. We are a nation of children, with a profound sense of entitlement and a complete lack of personal responsibility. Unfortunately, we are led by politicians who shamelessly pander to these children.

Rate Freezes and Moratoriums

When I first began writing this over the weekend, I thought that the government was getting on the boneheaded train with a "Mr. Freeze" plan, where Hank Paulson shoots all of the subprime mortgages in the U.S. with a freeze ray and locks their rates in for five years, which would be a total disaster. It turns out that his "plan" is for loan servicers to try to figure out which borrowers cannot afford higher rates, but can afford to stay in debt slavery by paying normal interest rates, and charge them those normal interest rates. Well, I have news for you... The servicers already do this!

Hank Paulson as Mr. Freeze? Not Quite

I'm glad that Hammerin' Hank Paulson realizes that an actual blanket rate freeze is a terrible idea (I think we all know how well price controls work). If lowering rates magically turned subprime borrowers into prime borrowers, well, then everyone would be charged the prime rate. It doesn't work that way. Subprime borrowers are charged higher rates because they tend to default more (a lot more) on their payments than prime borrowers. The high rates make sure I can earn a decent return on my investment after accounting for the high loss rates that I'll sustain by giving money to people with shaky credit histories. Freezing subprime rates at low levels virtually guarantees a loss on investment. With legislation pending in congress that makes the investor liable for "predatory" lending practices even though he never saw or met the borrower (he has to take someone else's word for it) and if the interest rates on loans can be reduced whenever politically expedient, who would ever take on such an investment? Any hope for private sector financing of subprime borrowers (what little is left) would be completely gone. As it stands now, subprime financing won't recover for some time.

We all can see what is going on: Most of the subprime "proposals" are desperate, self-serving attempts to put a floor under house prices, all of which are destined to succumb to economic reality. It all boils down to house owners not wanting to admit that their homes are worth less than they thought, and pandering politicians, who know otherwise, but pander to the house owners nonetheless. Now that the Ponzi scheme is over (they always end), house prices will have to re-set to levels that are affordable to the population, regardless of the amount of foreclosures. Forced sales simply expedite the process. Short-sighted policies, like freezing rates, a moratorium on foreclosures, or expanding the FHA to include ever-riskier borrowers (Yeah, were thinking about eliminating the 3% down payment and raising the loan limit to let the government extend no-money down loans to crummy credits in high priced areas - who do you think is going to pay for that one when they all blow up?) only delay the inevitable, and will end up doing much more harm then good.

-eternitus