The Real Mortgage Fraud

How Congress takes a problem and makes it worse

Nothing is more fun than doing noble deeds with someone else's money, and right now, Democrats are getting ready for a rollicking good time. Contemplating the subprime mortgage problem, with numerous borrowers unable to pay their debts, the party's presidential candidates and congressional leaders have a simple solution: Fleece the lenders.

The troubles arose because banks and finance companies offered mortgages to millions of people who, despite their imperfect credit histories, yearned to buy homes. The loans generally start out with a low interest rate that, after a couple of years, rises substantially. Some homebuyers now discover that the reset payments are more than they can handle. On top of that, falling real estate prices mean some can't recoup by selling, because the home is now worth less than the mortgage.

This spectacle has brought forth recriminations from politicians who picture the lenders as James Bond villains, cackling at the chance to toss hard-working families out on the street. In fact, this course is almost as bad a deal for lenders as it is for borrowers. They typically lose up to half the value of the mortgage on foreclosures.

From listening to the critics, you'd never guess that. Barack Obama denounces "predatory lenders" for "driving low-income families into financial ruin." Barney Frank (D-Mass.), who chairs the House Financial Services Committee, blames everything on an epidemic of "abusive lending."

But lenders who made bad decisions are already paying the price. Many mortgage companies have gone bankrupt. And if these loans are so unconscionable, the question is not why the foreclosure rate is so high but why it's so low.

According to the Mortgage Bankers Association, less than 5 percent of subprime adjustable-rate mortgages are in the process of foreclosure. The vast majority of borrowers are making their payments, keeping their homes and asking no one for a bailout.

Nor is it clear that soaring payments are the chief culprit. Foreclosures are most common in places where home prices are falling-such as California, Florida, Michigan and Ohio, which account for half of all foreclosures this year. Apparently many borrowers, seeing no point in paying off a $200,000 debt for the privilege of owning a $170,000 home, have elected to walk away from their obligations.

The remedies urged by Hillary Clinton, John Edwards and the like include placing a moratorium on foreclosures, freezing teaser rates for five years or more, and forcing lenders to reduce loan amounts to reflect deflated home values. These options are conspicuous for a couple major defects.

The first is that they punish lenders for the failings of borrowers. Why should someone who has kept the terms of a contract be penalized for the benefit of the party that didn't? A lot of people took a calculated gamble on interest rates and home prices. Had they bet right, they'd be reaping the rewards. Since they bet wrong, they are entitled to bear the consequences.

It's true that if lenders have committed fraud with phony information about their loans, they deserve to be separated from their ill-gotten gains. At the same time, honest ones shouldn't be punished for offering creative terms just because the loans sometimes go bad.

When we're talking about faceless institutions, it may sound reasonable to confiscate a share of their assets. But there's no reason to stop with these greedy usurers.

Say I sell my home at a handsome premium to someone who, we now learn, has been victimized by a "predatory" loan. Why should I benefit from the lending abuse? If the mortgage company has to sacrifice some of its profit so the buyer can avert eviction, why shouldn't I have to turn over a portion of mine? Most of us would fail to see the justice in this humane act of redistribution.

If the government imposes the punitive option, another problem will arise down the road: Lenders will be far less willing to offer credit to people with flawed credit records. Even the Bush administration's plan for mortgage companies to freeze rates on a small number of loans effectively warns lenders to steer clear of all but the soundest borrowers. As Yogi Berra might put it, if mortgage companies don't want to do business with certain customers, nobody is going to stop them.

The consequence of this approach is clear. We'd be robbing tomorrow's subprime borrowers for the benefit of today's. Of course, when it comes to proposed solutions, robbery seems to be the order of the day.

COPYRIGHT 2007 CREATORS SYNDICATE, INC.