Thursday, March 22, 2007

Just say NO to bailing out subprime lenders

The US Senate Committee on Banking, Housing, and Urban Affairs is holding hearings on the subprime mortgage market to determine the causes and consequences of the turmoil lenders have created. The cause is pretty obvious. From Bloomberg:
"Abusive'' lending and fraud helped fuel a surge in subprime mortgage defaults, the regulator of the biggest U.S. banks told senators probing federal agencies' response to trouble in the markets.
The consequences are obvious too. Experts predict up to two million people will lose their homes, stocks in financial services have taken a hit, and nearly 20 subprime lenders have gone out of business.

Those consequences will also have consequences that could affect the rest of us: U.S. states oppose bailout to subprime lenders
"I strongly encourage Congress to avoid using taxpayer funds to bail out the subprime lenders, brokers and investors that generated our current problem," Joseph Smith, the North Carolina Commissioner of Banks, said in remarks prepared for a Senate hearing. [emphasis mine]
Absolutely. I can't believe this idea is even being considered. Why should companies who practiced abusive lending and fraud get a taxpayer bailout when consumers with serious medical bills can't get relief through bankruptcy?

Remember the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005? Republicans said that would strengthen our economy, among other things:
House Speaker Dennis Hastert, R-Ill., said Congress sent "a firm and resounding message" that the federal bankruptcy system "will no longer be a shelter for abuse." And Rep. Phil Gingrey, R-Ga., said the new law will change America's "when-in-doubt-bail-out" system of dealing with debts.
No double standards. If it's good for the consumer, then it's good for business too.

If anyone should get help, I think it should be the borrowers who were victims of these predatory lenders. Hillary Clinton is pushing for a federally mandated "foreclosure timeout" that would give homeowners more time to catch up on their payments, and she wants to curtail the prepayment penalties that make it hard for troubled borrowers to refinance. Those suggestions seem reasonable, as does the suggestion from the hearing that Congress require lenders to set a default loan for subprime borrowers at a 30-year fixed rate, and to modernize the FHA so that it can lend to some subprime borrowers.

There was one other suggestion from the hearing worth noting too:
Lawmakers should also take the step of requiring lenders to consider a borrower's ability to repay a loan before making one.
Well, of course, that's just common sense, and now the free market will have to live with the consequences of their failure to do the right thing - government intervention.


Aaron A. said...

No wonder they are giving away vacation trips to the Bahamas and Cancun when one "does business" with a certain lender.

CEW said...

Yes, I couldn't agree more. And how about some reform that would legally call subprime lending practices fraud? They are predatory and deceptive.

Kathy said...

Aaron, I didn't know about the vacations, but it doesn't surprise me. There's lots of money to be made in that industry and some unscrupulous companies will do whatever they can to get their fingers in the pie.

CEW, I agree with you. Reforms to protect consumers from these companies is definitely in order.

Anonymous said... and I are so on the same page...again! :-) I just posted on this, speculating that the shakeout in the sub-prime lending market might actually be a good thing, for a number of reasons.