Have you ever met a politician who didn’t make promises that could not be delivered? I haven’t, either.
Of course, there are promises… and then there are promises.
If you are someone with an adjustable rate mortgage who has run aground, then you might like Hillary Clinton’s promise to freeze interest rates for five years. If you’re all the rest of us, however….
The Clinton proposal is a blunt tool applied too broadly to problems that are, in principle, contained and specific. Only 3.1 percent of prime (good credit) ARM loans are seriously (90 days or more) delinquent. The disconcerting delinquency rate of 16 percent is for the subprime sector–which is alarming, to be sure, but 84 percent are not seriously delinquent. Over the last three years there was an unusually large volume of aggressive lending activity with flaws at several levels. Some borrowers were led into loans they did not understand. These people deserve some concern. Other loans were made to speculators who do not live in the homes and were betting that house prices would continue to go up. The inhabitants of these homes deserve our concern, but the investors do not. It is now clear that there were too few checks and controls to assure reasonable loan underwriting practices (for example, no escrow accounts for taxes and insurance) or even good recordkeeping.
An accurate assessment of the current mortgage problem would probably reveal no more than 700,000 loans with distressed borrowers. Why, then, would the U.S. government rewrite eleven million loans, or even all 3.4 million subprime mortgages? Any intervention should be targeted at the borrowers who are truly in trouble, especially those who were likely duped by unscrupulous mortgage lenders. The numbers suggest these victims are disproportionately poor, young, and African American. Looking forward, the government needs to take steps to make this market more transparent and make it easier for borrowers to make good choices. But it would be irresponsible to do this by ruling millions of legal contracts null and void.
Senator Clinton’s policy amounts to a command-and-control approach to economic policy in which the government announces prices and tells suppliers what to produce. Undertaking such an intervention can only raise interest rates on mortgages (and maybe other interest rates as well) as markets attempt to incorporate risk premiums to cope with possible future interventions. Promising the American people that you can fix things by just lowering their interest rates is dishonest, a fairy tale that won’t come true.
I’m all for examining various remedies to modify the pain from the current mortgage and housing difficulties. Yet, the notion that we should undertake to destroy contracts and the relationships between investors and lenders is a bit frightening.
Of course, I find a lot about Senator Clinton to be on the frightening side….
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