Wednesday, September 12, 2007

The Democratic Party and Subprime

I am a Democrat. Some people who are close to me are not. They they are not has always been something of a mystery to me; as a railroad worker and an executive secretary, they would surely benefit from Democratic policies relative to Republican policies. But I think the sub-prime crisis has given me some insight into why they are Republicans.

This couple, while not affluent, have always been financially responsible. As such, it is not difficult for them to find credit at a cheap price. They would also never think to sign a piece of paper that represented their income to be something other than what it actually was.

Let me stipulate that among sub-prime borrowers, there are many who were harmed by unscrupulous lenders who engaged in deceptive practices. We know, for instance, that many sub-prime borrowers would have qualified for prime mortgages. That they did not receive such mortgages is a problem that need to be remedied. Policy should make it easy for them to refinance out of their subprime mortgages into something more favorable.

But there are also borrowers in the sub-prime market who speculated on the housing markets, and there are borrowers who misrepresented their income and assets. For many of those of have followed the rules, anything that might smack of of a bail-out of those who speculated or borrowed fraudulently will induce anger. My friends are such people, and they believe that the Democratic Party has long been in the vanguard of diverting resources away from them toward those who don't, in Bill Clinton's phrase, "play by the rules." As we seek to solve this problem, and to remedy that harm that was done to those who were victimized by truly bad actors, we Democrats need to remember those who have always played by the rules.


Elvis.Jim said...

I couldn't agree more. All of these proposals to fix one thing have unintended consequences for the property markets. The Sarbanes Oxley regs for instance have pushed some jobs out of New York and into London with some negative impacts on real estate demand in the U.S. (of course it did increase the demand for self-storage space due to new record keeping needs).

An unintended consequence of bailing out even those where were led into loans fraudulently is that by providing extra liquidity to the market, prices may not fall very much. If we want to reward those who saved their pennies building up a down payment, in other words, playing by the rules, don't bail out anybody. Many more homeowners would default and be forced into forclosure and prices would fall rewarding the thrifty.

Sub-prime borrowers who were truly defrauded could be helped in other ways such as cash-payments to help them re-pay the balance of their loans.

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