Mortgage crisis triggers bad proposals

HOW HE SEES IT

Mortgage crisis triggers bad proposals

By JAY AMBROSE

Scripps Howard News Service

Back in the late 1980s, I was a Pulitzer judge, sitting at a table at Columbia University in New York, reading newspaper stories in search of some worthy of American journalism’s greatest prize, and can remember nearby enthusiasm for a series out of Atlanta. It was about “redlining,” a topic of huge interest then.

Redlining was the supposed practice of banks refusing to extend loans based on skin color and, in effect, drawing red lines on maps around minority neighborhoods. Though this particular series did go on to win a Pulitzer that year, some contended the idea was bunkum — that what banks were really doing was refusing to offer loans to bad risks, some of whom happened to be minorities.

Back then, however, many argued that evil was being perpetrated. Reporters investigated, editorialists mourned the moral decrepitude of it all and regulators and other federal officials joined with community groups to persuade banks to ease up on their standards. Congress itself weighed in with legislation pressuring lenders to provide home mortgages with far less hesitation than good business sense dictated.

An unintended consequence was today’s ballooning number of foreclosures. Other reasons help account for the mortgage crisis, of course, such as some borrowers acting irresponsibly or even fraudulently and some banks thinking that a little deception here and there would not come back to haunt them. But the rush to extend mortgages to people who could not afford them and who sometimes had a history of not paying their bills was also instigated in no small measure by the redlining hyperbole.

Testimony about all of this comes from a tellingly detailed New York Post piece by Stan Liebowitz, an economist at the University of Texas at Dallas, and at the conclusion of an article by Alan Reynolds, a senior fellow at the Cato Institute. Reynolds brings up this example of unintended consequences by way of underlining how we may once again face unintended consequences from government intervention on mortgages, this time at the hands of Barack Obama.

Obama wants multi-year prison sentences for bankers and others who “hoodwink” poor people into homes beyond their means, and as with some in Congress, he wants bankruptcy judges to be able to change the terms of mortgage contracts. As Reynolds has noted, the first Obama plan could well keep banks from giving mortgages to anyone but the indisputably rich, and the second one could easily drive interest rates sky high for all new homebuyers.

Market forces

Obama and Hillary Rodham Clinton have been urging still more ideas on top of policies the Bush administration has already launched, as have other Democrats and a number of Republicans. While some of the proposals are more worthy than others, many are seen by critics as potentially destructive. The case has been made that the best move would be to keep the government mostly out of this jumble — to let the market sort things out because, if you don’t, the distortions will linger on, afflicting the country for many years. Maybe that’s an impossible prospect, and maybe we do need at least some additional steps to alleviate suffering and for the sake of innocent bystanders and of the economy in general, as is strongly argued.

But what we have a right to expect from our politicians is a prudence that was not exercised by many of the borrowers and lenders when some of these mortgage deals were first made. What we should demand from them is that they base their suggested policies on something more than good intentions or an opportunity to score points with an anxious electorate. What would help is for them to grasp that government can make things worse, and that we’re now in the fix we’re in at least partly because of ill-conceived solutions to a problem that wasn’t a problem.

X Jay Ambrose, formerly Washington director of editorial policy for Scripps Howard newspapers, is a columnist living in Colorado.