Dallas, TX –
When does a rescue produce the opposite result, hurting the very people it's designed to help? Think of this as the law of unintended consequences, and it's what will happen if congress "helps" the million or so people at risk of losing their homes to foreclosure.
We've all seen the news that tens of thousands of cheap mortgages are resetting to higher interest rates. Recently the Bush Administration "facilitated" an agreement among mortgage lenders and brokers to freeze the introductory interest rates for five years for some, but only some, borrowers who are at risk of foreclosure.
"Not enough!" cry a number of consumer groups and members of Congress, primarily Democrats.
Let's step back to the 1980s. The 1986 tax act dramatically changed the rules for bankers and mortgages. At the same time, Congress raised the amount insured by Federal Deposit Insurance from $40,000 to $100,000. Savings institutions found themselves in a new, riskier environment. The result was a debacle which took down hundreds of S&Ls, then killed big Dallas banks like Republic and InterFirst. I was here. It was painful.
When government acts, there are always these unintended consequences. When Congress passed the so called "luxury tax," it produced no new tax money, but it did cause the loss of 25,000 jobs in the luxury boat building industry.
It is indeed painful when a family is in financial distress, and losing a home and the equity in it, is tragic. And many borrowers are correct that they were bombarded with offers that seemed too good to be true. Low interest rates that would reset in the distant future. The real problem is that people who can't afford a mortgage, can't afford it. The Bush plan may help several hundred thousand people. Bailing out the million or so people who have those subprime mortgages will carry a very significant price tag. The investors who buy the mortgages from the initial lenders are going to require what's called an additional risk premium, that is, they're going to charge the rest of us higher interest rates. Government is essentially saying "We have the right to step in, after you've made an investment, and tell you we're going to reduce the income you're getting." This will have a huge impact on the capital markets. The result will be fewer loans for homeownership. Just the opposite of what Congress intends.
We might defend the Bush plan by noting that the President has the responsibility under the Employment Act of 1946 to maintain confidence in the economy and thus employment. But before Congress and the presidential candidates decide to rescue everyone, they should take a quick history lesson. Other wise, better get ready to go back to the future.
Merrie Spaeth is a communications consultant based in Dallas.
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