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Mortgage bailout far from conservative
Boyum Phil
Phil Boyum
Over the past couple of weeks, I have been critical of the president and his administration for the war in Iraq they dragged us into and the trillion or so dollars they have literally spent blowing up nouns - you know, people, places and things. For this, I've have been called a liberal (not to mention a few things I can't put in print).
    Funny, I always thought not killing people was the conservative approach to diplomacy (more on this next week).
    Now, thanks to Treasury Secretary Henry Paulson, with the support of the president, I can now bash this administration more directly on its economic policies, which certainly stray from typical economic conservatism.
    In case you didn't catch it Thursday, the administration rolled out the preliminary draft of a plan to aid certain homeowners who face the possibility of rate hikes in their mortgages. The plan would freeze the current interest on these mortgages for up to five years.
    According to Business Week, people who received loans between Jan. 1, 2005 and July 31, 2007, and are facing interest rate increases between Jan. 1, 2008 and July 31. 2010, would be eligible. In order to obtain this government-forced relief, the mortgage has to be on a personal residence - investors will not be spared. It would also exclude anyone who has already been late with a payment.
    This approach presents significant problems since a mortgage is a private, voluntary contract between two entities. To mess with the sanctity of the private contract would increase the "moral hazard" - an economic concept stating that an individual or company would behave differently if it was insulated from risk. In other words, by rescuing mortgage buyers, lenders and investors from their own faulty practices, the problem could actually get worse since they would anticipate the government would bail them out next time.
    The beauty of a free market is that resources are allocated to those who use them effectively. In this case, capital - money - has been allocated inefficiently and ineffectively by those mortgage brokers and mortgage companies that took on an ever increasing percentage of these sub-prime loans. The people who were given these loans shouldn't have received them, the people who signed the contracts shouldn't have issued them and the investors who purchased the securities should have done their homework.    
    The bottom-line is this: no one forced any of these people to sign on the dotted line. They bought houses they couldn't afford, with interest rates that weren't fixed and with incomes that were either insufficient or unverified.
    When I went to buy my house, I did the research anyone should do when they are planning on buying a six-figure product with a 15 to 30-year payment schedule. In my research - easily accomplished on the Internet - I found a few practical rules for obtaining a mortgage.
    For instance, it's recommended the total monthly payment should not exceed 25 percent of your net income. Also, never finance 100 percent of the purchase price. Have a down payment of at least 20 percent of the price. Most importantly, a buyer should seek multiple sources of funding including banks, credit unions and mortgage brokers. Never should a buyer engage in one-stop shopping.
    What I'm getting at is that individuals should have taken the responsibility to do the necessary research and realize that upward business cycles don't last forever (Anyone remember the tech bubble in the late 90s? How about tulipmania? Hello?).
    Back in August 2003, economic writer Gary North was predicting (as were others) that the market on housing was overheating in his article on LewRockwell.com entitled "Pop Goes the Bubble."    
    "There are going to be some real bargains in the housing market over the next few years. Desperate sellers without any equity and without enough disposable income to meet their monthly payments will walk away from their homes," he wrote. "Fannie [Mae] and Freddie [Mac] will have to auction off these abandoned, repossessed houses. This will put downward pressure on the price of homes."
    By the way, if anyone thinks the administration is doing this to look out for the little guy, please don't be fooled. By shoring up the mortgages, this action helps maintain the value of the securities which were created by bundled mortgages. In other words, it protects the value of multi-million dollar mutual funds with the facade of helping the little guy for a little while.
    The band, Lifehouse, has a song "Fool" whose first line is "Seems my own arrogance has knocked me off my feet again." Conservative economics teaches you should pick yourself up.
    Phil Boyum may be insulted at 489-9454.
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