THE DETAILS: Home foreclosures, and the rate of homes entering the foreclosure process, rose to a record in 2007 as homeowners battled slumping house prices and spiking loan payments.
THE DEBATE: Who is to blame? The borrowers – for their questionable financial management and for taking out loans they did not understand and could not afford? Or the lenders – for offering loans that they sold as being less expensive than they really were?
COMMENTARY: The subprime lending debacle has its roots in a combination of factors. Aggressive real estate agents, lenders, home developers, banks and financial institutions got involved in the mortgage lending, management and investing process. The Fed has been criticized at both ends of the issue — for doing too little and too much: for not doing enough to prevent the crisis from happening, as well as artificially assisting homeowners in trouble by providing bail-outs and protections after the fact.
In my opinion, what we should have is a free market in which you’re held responsible for your own decisions. If those decisions are wise, you’ll profit; if they’re reckless, you’ll have only yourself to blame.
We’re Not Tracking Finances,Spending and Borrowing Well Enough
Borrowers willingly took on these mortgages. They are the ones with the most intimate knowledge of their own financial situation, risks, job stability and future prospects. They are the ones who are responsible for their own financial tracking. That’s information no credit score or income statement will ever reveal. As such, it is their responsibility to read and understand the terms of their loan, and determine their loan cost now and into the future. People who make poor financial decisions or speculate carelessly will lose money — and that’s the harsh reality and efficiency of a free market.
To bail-out such borrowers (as the “Anti-Predatory Lending Act of 2007” does) sends a horrible message to everyone else: that if you borrow to own or speculate in housing that you cannot reasonably expect to afford, and if the market turns against you, then you can count on a government hand-out or a legislated low-rate to soften your fall.
Imagine that we applied the same logic to credit cards. Lenders “ought to know better” than to approve a new card with a $20,000 limit, if the borrower already has significant credit card debt. Is it the fault of the card company, or is it the fault of the consumer who cannot control their spending, who hasn’t spent enough time tracking finances, and has requested yet another card to fuel their shopping sprees?
The Real Culprit of the Subprime Mortgage Crisis?
Surprisingly, few in the media are calling out the original culprit here: a government policy of monetary manipulation that pushed interest rates to artificial lows. This, along with “pro-housing” legislation and tax-breaks, sent a signal to some that housing was a can’t-miss proposition. But when interest rates are decided by the whims of bureaucrats, the party can end at any time…and unfortunately, it looks like it has. Here is a link to a useful mortgage calculator