George Bush and other powerful politicians have been scrambling to appease pleas for relief that are wafting up from the rubble of the subprime market meltdown. Subprime lending, at its core, is not a shady practice. It was established to give first-time homebuyers and those that had undergone financial hardships a second chance. Ideally it helps these groups of people achieve the American dream of homeownership. For the majority of subprime borrowers that are current on their loans, this dream is being realized.
Who is to blame then for the transformation of this dream into a nightmare? Trillions of dollars have been lost, large lenders gone under, credit has dried up and now extremely naïve or overindulgent homebuyers are standing next to the wealthy Wall Street tycoons looking to you for a handout. And Uncle Sam is complying with their demands.
The government-subsidized corporations Fannie Mae, Freddie Mac as well as the Federal Housing Administration have all taken center stage during the meltdown. They are designed to stabilize the mortgage market by insuring mortgage-backed securities. These securities are simply groups of home loans that are bundled together and securitized by Wall Street firms that then pass the risk on to investors. The demand for these securities skyrocketed in the last several years and Wall Street seemingly didn’t mind that some of these securities had little value backing them.
Lenders supplied naïve or overindulgent borrowers with interest-only, low or no-documentation loans, aggressive adjustable rate mortgages and other non-conventional loans. Homeowners are beginning to find that their opportunity to refinance out of these unconventional types of loans is drying up with the availability of credit, resulting in foreclosure and the downturn of the economy.
Under these circumstances an overindulgent and indebted government is coming to the rescue of overindulgent and indebted homebuyers and institutions. Government-subsidized and therefore tax-subsidized institutions are increasing their capacity in order to dry the eyes of McMansion owners with our tax dollars. Not to mention that they get to keep their overindulgent purchases. Their loans are modified and the government pours tax dollars into the market in order to stabilize lending and profitable operations for the Wall Street decision makers that are largely responsible for the meltdown.
Wall Street firms have been paying the price for their easy money schemes; hopefully, they will realize that as they are demanding more loans, the quality and reliability of these loans will decrease as increasingly shady loans are written. Wall Street must stop purchasing these types of loans or delinquencies and defaults will force them to purchase smaller amounts while destabilizing the whole market and damaging their own profits in other sectors. This means that more taxpayers’ money will be used to buy loans, bundle securities and insure them in an effort to bail out troubled lenders and bolster the financial industry. Tax payers should be irate that their tax dollars are used to fix the mistakes of unethical, quick money decisions by institutions that are backed by Uncle Sam.
The government must realize that their macroeconomic safety nets are diluted when an enormous trade deficit allows foreign entities to directly influence interest rates and the wider U.S. economy through the purchase of treasury bonds. We must wake up to the fact that the trillion dollars in U.S. government securities are controlled by these entities. The government must quit throwing money at its problems and undergo a difficult but necessary change in its policy. The government, like the overindulgent consumers, must begin to live within its means.
Subprime lending provides opportunities for those individuals who are honest with themselves and realistic with their financial situations. Unfortunately, greed and overindulgence intermixed with unrealistic desires and naivety also describes a portion of the subprime markets borrowers. The solution is not to do away with subprime lending but to change consumption habits, corporate decisions and fiscal policy. Avoiding unnecessary debt, living beneath your means, saving and planning have been preached by church leaders from the beginning and emphasized as of late. These are truths that should be adhered to by consumers, institutions and governments in order to avoid this and other economic calamities.
Mitch Rencher is a recent graduate of Brigham Young University.
Copyright Brigham Young University 12 Sep 2007
