The Idiocy of a Subprime Mortgage Bailout

As you know based upon some of my past posts, I have a disdain for politics in general. The whole reaction to the subprime mortgage situation provides me with another example why I HATE politicians so much.

For those of you who aren't familiar with what the subprime situation is, I will endevor to summarize what it is. Basically, the number of mortgage loan defaults (i.e. "I can't pay my mortgage bill") is increasing, especially in the area of "subprime" loans. A subprime loan is a mortgage loan given to a person who is a high credit risk. This person might have some questionable items on his or her credit report, or they might be asking for a loan that might be too large for their given income. Some lenders will steer clear of such people; however, there is a group of lenders who are willing to look past these blemishes and still give a person a mortgage loan. Usually, they will lend the money by charging a higher interest rate, or they might have an adjustable rate which starts out low but then adjusts based upon the market conditions.

Now these subprime lenders are finding that the number of people who are defaulting on these loans are on the rise, and so our politicians are sounding the alarm bells. There is one proposal in particular that is being put forth by Senator Charles Schumer of New York (a democrat - what a shock!) which would provide government assistance to people who are in danger of defauling on their mortgage loans. There are still some details to work out, but it seems as if this proposal could cost taxpayers anywhere from $120 million to $17.6 billion. That is a lot of money by anyone's accounting.

The question in my mind is this: should the good taxpayers of this country be spending money helping out people who are defaulting on their loans? I believe that the answer is a firm NO!

First of all, the people who took out these loans should be held accountable for their decisions. It's not like anybody forced them to take out these loans. Having taken out a mortgage myself, I know that there is tons of documents, disclosures, and so forth that you have to read and sign in order to complete the transaction. If somebody did not read and understand these disclosures, then shame on them. If somebody took out a loan that was beyond their means, shame on them again. Why should they get a gift from the government to help them avoid foreclosure when responsible citizens like me do the right thing and take out a loan that we are able to pay comfortably every month? I know it sounds harsh, but if the government provides these people with subsidies for being irresponsible, then all it does is encourage people to be reckless with their money. After all, if they screw up, they will know that Big Brother will be there to bail them out.

You might say that our goverment is just being "paternalistic", meaning that the government needs to protect its citizens because the government somehow "knows better". I absolutely hate that assertion. The word "paternalistic" is derived from the Latin work for "father". Now if you are a parent, are you doing your child a favor by constantly bailing your child out of trouble, without letting him or her face the consequences of his actions? Of course not! A good parent is often called upon to dispense "tough love", because this is often the best way for a child to learn some important life lesson.

The problem with the "paternalistic government" philosophy is that it is bad parenting, plain and simple. Why should we tolerate that philosophy in our government when we wouldn't tolerate it in our own lives.

Along those same lines, subprime lenders should be held accountable for their actions as well. Lenders often loan money to credit risks in an attempt to make money for themselves. They can charge higher fees and interest rates to such borrowers, and so there is an obvious risk-reward tradeoff. They are hoping that enough borrowers will pay back these loans to offset the ones that default. In most cases, lenders make money in aggregate. However, there are times when lenders get too aggressive in their underwriting, and they end up taking on too many bad credit risks. If the government bails them out, then the lenders aren't learning any positive lessons either. Lenders will keep on making bad loans because they know that the government is going to step in and make sure that these loans won't default. If lenders were forced to take a loss because they made too many bad loans, then they might be so short-sighted and greedy with their lending practices.

Despite all this, I have no doubt that our government will probably pass some sort of bailout bill, because it makes for good press on the evening news. That is just another reason why I hate politics so much.