Sometimes, it’s hard to figure out whether a political stand is based on heartlessness or common sense. Take, for example, U.S. Rep. Christopher Shays, a Fairfield County Republican who serves on the House Committee on Financial Services. That body is mulling legislative action to bail out homebuyers who are getting squeezed in an interest rate trap.
Most of the affected buyers are “subprime” borrowers. That means that they have less than stellar credit. For the past five years or so, lenders have been feasting on this market — a market they wouldn’t have deigned to even acknowledge a decade ago. For some time, it’s been good business making loans to people who shouldn’t be able to get them. Mortgage companies cut such borrowers free from any standards of prudent lending — such as a down payment, qualifying income, or basic understanding of finance — and the borrowers were all too happy to grab the easy money. Weren’t they, after all, simply pursuing the American dream of homeownership?
Dreams, though, are vaporous things, and so is owning a home when there isn’t enough money to pay the bills. Many such borrowers took a gamble: home prices would keep skyrocketing, and their income would keep notching up. The subprime loans were frequently adjustable rate mortgages with comically low initial rates. But such loans live up to their name: they adjust, and when they do, it’s usually upward. Many of those mortgages are coming due to reprice. The borrowers can’t afford the new payments (their income didn’t rise enough) and they can’t find lenders willing to re-write the note (the equity did not grow.) Their gamble has come up snake eyes.
They weren’t the only ones gambling, of course. The careless lenders were also shooting the dice. They’ve since suffered billions of dollars in losses and many — like Middletown’s Mortgage Lenders Network — have had to shut their doors.
The federal government has not stepped in to bail out the imprudent providers of funny money. Should it do so for the consumers who used the cash to buy their castles in the sky?
Shays seems dead set against it. “I can’t imagine helping people who should not have gotten a loan in the first place,” he said last week. Is that being heartless, or is it being practical?
Connecticut’s courts are gearing up for a surge in foreclosures. The number of such filings in state court jumped from less than 12,000 two years ago to nearly 16,000 in the last fiscal year. And the state’s judges and lawyers are expecting that to only go higher. And the Nutmeg State’s numbers are piddly compared to states such as Ohio and California.
Clearly, many people are about to land in trouble. One Congressional report estimates as many as 2 million subprime mortgages could end up in foreclosure over the next 18 months.
Should taxpayers somehow come to the rescue? Or, painful as it may be, should the free market be left to its proven devices? Shouldn’t consumers, after all, shoulder some responsibility for the choices they make, especially ones that involve hundreds of thousands of dollars? Even homes that do go into foreclosure benefit someone who is able to acquire property at prices that are affordable.
Shays asserted that many subprime borrowers did not put any money down on their loans and “never really owned a home in the first place.” By that, of course, he means they were simply making rental payments to their bank. It’s wincing rhetoric, but perhaps it should also be winning rhetoric. The government cannot afford to bail out consumers who gambled and lost on a dream —and a no-money-down deal — too good to be real.
