Governmental Intervention Would Absolve Improper Behavior and Encourage Future Delinquency 

Everywhere you turn, the news media anguishes about the uptick in subprime delinquencies and the possible consequences to the larger economy.  Naturally, given our therapeutic "Oprah-ized" culture, much of this attention focuses on the latest supposed "victim class" in America:  irresponsible borrowers.  Armed with tear-jerker urban legends of millions of hardworking homeowners cast onto the streets, advocates of a governmental bailout appear at first glance to have compassion on their side. 

Such a bailout, however, would be both unfair and unwise, causing far more harm than it would alleviate. 

First, it is important to understand the basic nature of subprime mortgages.  These are simply loans made to lower-income borrowers, whose economic status and credit histories would otherwise render them unable to secure home loans.  Obviously, such borrowers pose a much greater risk to commercial lenders, because they are more likely to default on their repayments.  In order to compensate for this elevated risk, therefore, lenders justifiably require greater "cushion" in the form of higher rates, points or fees.  Such mortgages became increasingly popular after 2000, as the allure of home ownership and equity potential exploded. 

The alternative, of course, would simply be a refusal to loan to such lower-income borrowers entirely.  In the absence of subprime mortgages, these folks would possess no access to the American dream of homeownership, especially with rising home prices during the past decade. 

Due in part to the increased availability of subprime mortgages, American homeownership has reached an all-time high.  Still, subprime loans constitute a small percentage of all mortgages.  Even at their peak in 2006, subprime loans accounted for only 20% of all single-family mortgages, according to Inside Mortgage Finance Publication's 2007 Mortgage Market Statistical Annual. 

Unfortunately, like any other form of investment known to mankind, the housing market contained some natural element of risk.  In every type of loan, there exists the possibility that the borrower will not be able to repay or the gamble will fail.  This risk is increased in instances where the borrower misrepresented his or her income on the application, was a speculator seeking to "flip" a house by purchasing and quickly reselling it or simply took out a larger loan than he or she could afford.  The risk of default is also increased if the lender irresponsibly fails to verify the borrower's income and background. 

As the housing market began to cool in 2005, the unfounded expectation that housing prices would perpetually increase crumbled, and the number of delinquencies increased modestly. 

To address this problem, politicians and nanny-state advocates predictably pounced on this as a political issue and proposed governmental intervention.  But for a number of reasons, a governmental bailout would be both unfair and counterproductive. 

First, the problem itself is overstated.  In the first quarter of 2007, under 1% of all residential mortgages were delinquent, and only 2% were in foreclosure.  Even among subprime mortgages, only 3% were 60 days delinquent, and 5% in disclosure.  Moreover, many of those were second-home investment properties.  And while the number of defaults has increased relative to the immediately preceding years of the 2003-2004 housing boom, the delinquency rate is almost identical to the 2000-2001 delinquency rate. 

Second, remedies against dishonest lenders who illegally manipulated or defrauded vulnerable borrowers already exist.  A wide array of common-law and statutory causes of action allows borrowers or law enforcement officials to punish unscrupulous lenders and obtain remedial damages where those lenders lied, distorted or omitted material facts. 

Third, governmental intervention will reward irresponsible behavior by absolving culpable lenders and borrowers from the risks that they freely pursued, and encourage similar behavior in the future.  This is not the first housing bubble in American history, nor will it be our last.  Government intervention will merely establish the precedent that foolish economic risk will be absolved by taxpayers, thereby encouraging that very behavior now and in the future. 

Fourth, governmental intervention is fundamentally unfair because it destroys the basic societal expectation that lawful contracts will be enforced as written.  This is the cornerstone of contract law, on which our entire economy is set.  Should fully intelligent borrowers be relieved of the duty to read, understand and comply with the documents that they sign?  Subprime mortgages are legally-binding agreements, and aren't intrinsically unfair or predatory to poorer borrowers.  As noted above, 95% of these subprime borrowers fulfill their contractual repayment obligations.  Accordingly, there is no justification for further eroding the concept of contractual obligations and personal responsibility in an increasingly irresponsible culture, or for shifting the losses from irresponsible borrowers and lenders onto the backs of hardworking taxpayers. 

Accordingly, a governmental bailout or moratorium against future subprime mortgages would be inherently unfair and potentially destructive.  Subprime loans have made the dream of home ownership available to people whose incomes and credit histories would have otherwise excluded them.  Intrusive government intervention will only erode this dream and create the moral hazard of increased irresponsible behavior in the future.