Government has not helped latest money concerns
By Beth Cody, Writers’ Group member
Iowa City Press-Citizen
Wednesday, November 14, 2007

The news lately is full of heartbreaking stories about the recent increase in low-income borrowers losing their homes to foreclosure. There is a lot of finger pointing and the usual cries for government to “do something”. But as usual, government is partly responsible for the problem, and its attempts to fix it will only make things worse.

It started with the past decade’s rise in housing prices. Buyers borrowed larger amounts, and some resorted to riskier “sub-prime” mortgages: interest-only and ones with low “introductory” rates that were scheduled to rise after several years. They gambled that they would either be earning more money by then or could quickly sell their house for a tidy profit due to continually rising prices.

But an economic slowdown led to more houses on the market and lower prices. Sub-prime borrowers whose income didn’t rise as much as expected or who suffered illness or layoffs found that they only way to sell their houses in a hurry was to sell them at huge losses. Some couldn’t meet the increased interest payments and ended up losing their houses to foreclosure.

So why did it happen?

People are quick to point fingers at “predatory” lenders, greedy house-flippers, and irresponsible borrowers living above their means. There certainly have been some shady and reckless lending practices, and of course buyers did gamble on a future that none of us can control.

But government has contributed to this mess in a number of ways:

First, politicians in both parties love to engage in social engineering, and have decided that home ownership is a behavior that should be encouraged. Congress’ strong encouragement for banks to lend more to low-income borrowers, more government-insured loans, the mortgage interest tax deduction – all of these policies have made housing more expensive and encouraged families with marginal credit to buy a home. Government should not attempt to manipulate the behavior of citizens (other than outlawing criminal activity) because it almost always produces problems.

Second, it is easy to borrow money because interest rates have been kept artificially low by the Federal Reserve’s attempts to “steer” our economy, illustrating the danger of a central authority controlling our money.

Third, housing in many larger cities is more expensive than need be because zoning laws and anti-sprawl initiatives restrict housing supply.

Fourth, the tax burden borne by working families makes everyone less able to pay their bills. The average worker now pays nearly half of her earnings in various taxes and fees to all levels of government. No wonder families are losing their homes.

Fifth, promoting a mindset that the government should and does protect us from all risks lulls citizens into failing to become financially savvy. After all, we can always agitate for a bailout if we get into trouble.

And banks are indeed now petitioning Congress to bail them out. But this will only encourage more bad decisions in the future, hurting more borrowers and costing taxpayers. Letting lenders face the music will encourage more prudent business practices in the future.

Consumers too are demanding more government “protections”, but these will also have unpleasant consequences. Congress has introduced legislation that would require banks to ensure that borrowers have a “reasonable ability to repay” loans that are “solely in the best interest of the consumer”.

Sounds great, but the vagueness will open the floodgates for borrowers to sue their banks at the drop of a hat. Banks will simply pass the cost of litigation on to consumers in higher mortgage rates and lend only to borrowers with good income and credit records. Low-income families will find it much harder to get mortgages at all.

Government “help” is not needed. Many lenders are now allowing sub-prime borrowers to refinance at better rates because it makes good business sense. Foreclosure results in much larger losses than working with owners to keep them in their homes. And banks will lend more prudently in the future as a result of their losses.

When families lose their homes, it is heart-wrenching to watch. But in our anxiety we must not allow government to make things even worse for our children. Less government interference is the answer, as usual.