Thursday, December 13, 2007

The Way to REALLY Compound a Problem

The Bush Administration's subprime mortgage bailout plan, bad as it is, is looking rather benign compared to a truly dangerous bill that is making its way through the Democratic-controlled congress. Whereas the Bush plan uses the money of the taxpayers to "send a message" that borrowers and lenders can engage in bad credit practices without having to accept the full consequences of their risky behavior, the Mortgage Reform and Anti-Predatory Lending Act of 2007, which has already passed the House of Representatives, will put crippling and costly new conditions on mortgage lenders while virtually alleviating borrowers of the responsibility of exercizing due diligence when taking out loans.

Worse still, this bill would accrue to the government and the courts more of the kind of arbitrary powers vested in regulatory authorities like the FDA, FCC, and the Anti-trust laws. This is accomplished through the use of vague and undefinable terms that make it impossible for lenders to know whether they are breaking the law until some government bureaucrat or jury makes a (subjective) interpretation after the fact.

In an excellent commentary on titled Predatory Legislating, Yaron Brook explains what mortgage lenders would be up against if this bill becomes law:

"The bill tells lenders they may not engage in the undefined practice of 'predatory lending'--examples of which include vague offenses such as offering loans that are not 'solely in the best interest of the consumer' or offering loans that a borrower does not have a 'reasonable ability to repay.'

"Since the bill offers no clear standard of a 'reasonable ability to repay' or the 'best interest of the consumer,' if it is passed, lenders could be held liable for any loan a borrower fails to pay off. All an irresponsible borrower or unscrupulous lawyer needs to do is convince a jury in hindsight that the lender should have known better--and he can cash in at the lender's expense. To compound the injustice, the new law would apply, not only to those who initiate loans that fail, but to any financial institution that buys and pools loans made by others (a practice that makes possible better risk management and lower mortgage rates).

"If you were a mortgage lender facing this sword of Damocles for any loan that goes bad, what would you do? Exactly what mortgage lenders will do if this legislation passes: jack up rates to account for the high risk of lawsuits--and likely avoid lending to higher-risk candidates altogether."

What must be understood is that this bill will do nothing about the current "crisis". Indeed, the market is already doing a splendid job of punishing the irresponsible participants, with large lenders and investors losing billions of dollars and borrowers who cannot meet the higher mortgage payments they should have foreseen coming (assuming no fraud by the lender, which should result in prosecution) facing foreclosure. No, this bill is about shackling lenders. The result will be a much more restrictive mortgage market squeezing out many borrowers, which will serve as a rationalization for further government intrusions into the housing market.

The road to statism in America is being paved bit by bit by a process that is virtually imperceptable. Problems real or imagined are used as a cover for the steady expansion of the government's power over all aspects of our economic and personal affairs. The sympathy one can feel for those losing their homes or saddled with soaring mortgage payments should not blind us to the dangers of government "doing something" about this or that "problem" or protecting us from the consequences of our own freely taken actions.

Ronald Reagan once said "The ten most dangerous words in the English language are 'I'm from the government, and I'm here to help you'". We should really think about that, and consider where ignoring that advice is leading us.

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