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Sacramento

Keep Government Out of the Housing Market by Jon Coupal 9/13/07

Until recently, the closest thing to a sure bet was real estate. Especially in California. Buy a house, hold onto it for a few years, and you, too, could become a millionaire.

Unfortunately, the housing boom has turned into bust. Housing starts dropped to their lowest level in a decade in July. The number of foreclosures is expected to double next year, up from 1.2 million this year.

In just April, May, and June, nearly 20,000 Golden State residents lost their homes to foreclosures. And that number is sure to worsen both in California and across the nation in October and November, when $80 billion in adjustable rate mortgages get reset to higher levels.

In short, the housing market is a mess, but the problem was easily avoidable. Most people are careful about how much house they buy. Most banks are careful about how many dollars they lend. But the prospect of ever-rising prices caused some normally sober people to toss caution to the wind.

The result was a flood of "creative" lending, which allowed people with dubious credit records into homes by charging them low initial interest rates. As long as prices were rising, the future was expected to take care of itself.

Lenders cheerfully issued these dubious "subprime" mortgages. Then, explains Lawrence McQuillan of the Pacific Research Institute, many of these loans "were bundled together into collateralized debt obligations (CDOs). Roughly $320 billion worth of CDOs were issued last year alone." Now hedge funds and mutual funds alike are taking big financial hits.

This isn't the first time that homeowners, lenders, or investors have gotten into trouble. The adjustment process is painful but inevitable, and will cause a lot of losses all around.

It would be even more costly to bail out everyone. The taxpayers would be stuck bearing the burden for decisions about which they were never consulted. You make a bad loan, I have to pay. Hardly seems fair, does it?

A bailout would make real saps of those who acted responsibly. Renters who saved up for a down payment so they could buy a home. People who purchased a smaller house than they really desired so they could stay within their means. Too bad they didn't join the subprime rush and let Sacramento or Washington take care of them!

But as Lawrence McQuillan points out, "A bailout would be foolish as well as unjust. It would encourage irresponsible behavior by borrowers, lenders, and investors throughout the economy."

Especially dangerous are proposals for the Federal Reserve to manipulate the nation's money supply to help a few speculators. That could lead to much larger economic problems.

Who can predict the next big financial debacle? What we can say with certainty is that if we bail out the housing market, the line of special interests seeking government aid in the next economic crisis will grow even longer. CRO

copyright 2007 Howard Jarvis Taxpayers association

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