Can Government Ease Subprime Mortgage Woes? Finance Expert’s Study Explores Remedies, Dangers

(Alexandria, VA), Sep 7, 2007 — Some policymakers are pressing for government intervention to nurse ailing “subprime” mortgage markets and consumers back to health, but a new study commissioned on behalf of the nonpartisan National Taxpayers Union (NTU) is delivering a warning: don’t overmedicate.

“Any issue that touches upon home ownership, and the fear of losing one’s home, is bound to generate passionate discussion,” said study author Jacob Vigdor, Associate Professor of Public Policy Studies and Economics at Duke University. “While many agree that the current wave of delinquencies and foreclosures will strain households and communities, there is considerable disagreement as to whether government involvement is advisable, and if so, what shape it should take.”

Recent tremors in the housing market have significantly impacted some subprime mortgage lenders and borrowers, leading to many proposed “fixes” from state governments, Congress, and most recently President Bush. But Vigdor, a Harvard-educated economist and expert in housing issues, believes that intervention in this market could have unforeseen consequences. Among his contentions:

• Overstretched borrowers, overaggressive brokers, and overeager lenders are bound to be hit when interest rates rise or home prices fall, especially for subprime participants. But the evidence so far doesn’t indicate a “crisis.” Delinquency, foreclosure, and held-for-sale rates of subprime mortgages originated in 2006 are higher than for loans originated in 2003 and 2004, but they are on par with those originated and securitized in 2000-2001.

• According to recent data, about 7 percent of subprime loans originating in 2006 were in danger of being held for sale, foreclosed upon, or going delinquent. Those not facing such problems may be squeezed, but, as Vigdor notes, “The only sure way to eliminate the high rate of foreclosures in the subprime market would be to eliminate the market entirely,” depriving the other 93-95 percent of subprime borrowers of their American Dream.

• Public officials have called for foreclosure moratoriums, taxpayer-backed loans to troubled borrowers, and lender-restrictions that effectively rewrite mortgage contracts – all of which socialize the risk while encouraging recklessness by borrowers and lenders. This “moral hazard” means that “wealth is redistributed from the responsible to the irresponsible, from the ethical to the unethical,” Vigdor observes.

If most “solutions” under consideration would make subprime mortgage woes worse, what would help? Vigdor asserts that streamlined (and strengthened) disclosure rules to give both loan parties a clearer sense of their responsibilities; community-level financial education programs; and, foreclosure counseling, are all elements of a reform effort that “carefully balances a government role for regulation with the need for borrowers, lenders, and investors to bear responsibility for their own actions.”

NTU V-P for Communications Pete Sepp, who has followed and testified on financial industry reform issues since the S&L debacle, agreed with many of the report’s findings. “History shows that government ineptitude has been far more harmful to taxpayers than government inaction,” he said. “The subprime mortgage issue needs a light touch to strengthen the relationship between consumers and providers, not a heavy hand of intervention that strangles our economic freedom.”

The 362,000-member NTU is a citizen group founded in 1969 to work for lower taxes, less wasteful spending, and accountable government. Note: The study, What Should Government Do about the Subprime Mortgage Market? A Taxpayer’s Guide, is available at www.ntu.org. The contents of the study do not entirely or necessarily reflect the views of the National Taxpayers Union.