Free-market fiddling
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ree market principles are fine in concept, but when they conflict with political expediency, it's no mystery which side will win.
Predictably, President Bush threw his lot in with politics last week when he announced a voluntary agreement by mortgage lenders to freeze subprime rates for so-called "teaser loans" made to high-risk borrowers between 2005 and July 30 of this year. The Treasury secretary called the subprime lenders to a meeting, where they acquiesced to his request for them to freeze lower-interest teaser rates for five years. The Bush administration calls it "voluntary," but a more accurate word might be coercion.
The subprime market caters to borrowers with inconsistent credit histories who would not otherwise qualify for standard low-rate, fixed-interest home loans. To obtain these customers, lenders offered the buyers temporary -- teaser -- interest rates of still-higher-than-average 7 percent to 8 percent. Many of the borrowers eagerly signed on, hoping the nation's real estate bubble would continue to inflate, not burst; before the teaser rates reset up to 11 percent or 12 percent, they hoped to re-establish solid credit and refinance their loans at lower rates. Or, barring that, they gambled their homes would appreciate in value enough to sell them and use the equity to purchase another home.
It was a house of cards that was doomed to failure, and it's affecting as many as 1.2 million borrowers nationwide. That number, though, is still small compared to all loans secured during that aforementioned 18-month period. And it's true, too, that while the third quarter of this year saw a record number of home foreclosures, they only represent about three-quarters of 1 percent of all home loans, and 95 percent of all loans are still being repaid on time.
But that thin slice of the pie representing the subprime market has an out-sized effect on consumer confidence. With the U.S. economy, by some accounts, teetering on the edge of recession, continued home foreclosures -- even involving only those banks that made too-risky loans and the people who signed up knowing they couldn't afford them -- could further spook real estate investors.
That's the administration's justification, anyway. We're of the opinion that people should be made to live with the consequences of their own poor decisions. Besides, banks could have negotiated freezes or other terms on their own for customers without Treasury's strong-arming.
This whole experience screams something obvious: People are buying houses they can't afford. But the free market isn't being allowed to perform its process of natural selection. Time will tell whether the Bush administration's intervention proves wise or folly.
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