Think I’m kidding? Just read nearly any newspaper to get an idea of the nonsense being floated about. Some of the latest “solutions" being discussed for these lenders experiencing such high mortgage default rates are government bailouts.
For anyone needing a translation, “government bailout" or “subsidy", means the feds picking up the tab for corporate foolishness. And since the government has no money except what we taxpayers provide them, guess who really pays?
What that really means is we end up paying for the poor judgment and financial irresponsibility exercised by some mortgage lenders. I mean what else do you call it, when they loan money to folks with credit scores falling off the bottom of the charts, and whose credit history has already demonstrated they are highly likely to default again.
Does this make sense to anyone?
The extent of the problem is finally starting to get the attention it deserves and now everyone is wringing their hands wondering what to do. So here’s a thought – how about the government staying out of it? Let the marketplace sort it out. Yeah, lots of people will suffer, but quite frankly, a majority of them deserve to.
Lets look at the players starting with the so-called “victims", those borrowers who for whatever reason thought they could get a “free lunch". Certainly some of them were deceived by the predatory practices of some brokers, but most thought they could get something for nothing.
Think about it, you’ve got people making $60,000 a year going into a $340,000 house. “Oh but we really wanted (translated “deserve") it and the payments were so low". Yeah, for a while, then comes the rate adjustment that doubles their payment, and they call foul saying they didn’t know? Come on.
Next are the mortgage brokers and lenders. There’s actually nothing wrong with loaning money at higher rates to higher risk borrowers. However, many of these guys got so greedy with schemes to get a piece of everyone they could, they set the qualifying bar too low. They made two major mistakes. They put together deals that weren’t sustainable over the long term, and they used a spread that didn’t cover the losses that would surely follow.
Last in the line are the wall street traders and investors. Top traders each earn millions every year trading mortgages bundled up and securitized. If fact most of the big firms now have their own mortgage underwriting arm whose sole purpose in life is to feed the trading desks. Again, nothing inherently wrong with this as long as everything is disclosed to potential investors.
Investors are always looking for ever higher returns, so if they ended up going for broke, some of them may be pretty exposed right now. For those who may not have been informed to what extent their bond instruments were comprised of subprime mortgage loans, they’ll end up as collateral damage, but the rest have no excuse.
But everyone seems to have forgotten the never-changing fact that with potential high reward, comes high risk. When it doesn’t work out, tough – get over it.
In this case the fallout will hurt a lot of people, and because this thing is so big and touches so much of our economy, many innocent folks will suffer as well. But look at the alternative. If a bailout happens, nobody has to pay for their naiveté or greed, and thus no learning takes place. And you know what? It’ll happen again.
John Allen writes on a range of topics from technology to finance. Read about subprime mortgages on his blog Simpler Living to find out more or obtain feeds.
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