The subprime crisis has dominated financial thinking lately including taking a few CEO scalps amongst banking companies. Why are we surprised? It was a high risk venture predicated on house prices rising forever. Those that take those risks should be able to accept them.
Government is not there to bail out those risk takers. Between the Greenspan/Bernanke put and now the Bush Administration negotiating that subprime mortgages not go to the higher interest rates for another three years - we have massive interventions into the allocation of risk and reward.
They are making the market fail.
From the article:
If adopted, this policy would create winners and losers. The winners would be people who bought homes they couldn't really afford by getting subprime loans whose rates were due to skyrocket after two or three years. Other winners would include the neighbors of these people, who wouldn't have to live next to empty, foreclosed houses. Local and state governments would benefit if the policy keeps property taxes rolling in. And there are those investors that the Journal mentions, the ones who are anxious about the mortgage meltdown. They must always be watched out for. The losers include people who want to buy houses, and who would benefit from increased inventories of distressed homes on the market. It's bad news for Realtors, lenders and mortgage brokers, who depend on home sales and refinances to stay in business.There are some issues here too; one is the investors who backed these high-risk are now expecting a high return for those that could afford the starting low price period and are now in the high interest rate part of the loan. Secondly the banks don't own these loans, they sold the subprime mortgages off into the equity market. They really don't have any authority to mess with these loans - nor does the government. The article continues:
And what about people who saved up for down payments and got responsible mortgages? This policy seems like a slap in the face to them. They're suckers. They should have been irresponsible with their debts and bought unaffordable houses with 2/28 subprime ARMs instead of being responsible, right? Is it good policy to reward subprime borrowers and make prime borrowers feel like schmucks?I was one of those people. I saved up a 20% down payment before buying a house. I don't particularly care about that; however, markets are markets and government bailing out of anyone who has been caught in a bad deal - whether Lockheed Martin or a subprime borrower - destroys the whole purpose of having a market system. The Bush Administration is wrong to do this.
