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Highlands Today

Government Help Needed To Resolve Subprime Crisis

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Highlands Today Staff

Published: December 3, 2007

Recent efforts to hammer out a proposal to temporarily freeze interest rates on certain troubled subprime mortgages have brought up an interesting quandary.

Is it the government's job to intervene in what is in part a crisis wrought by greedy lenders and naive and imprudent borrowers? Agreed, the government should not bail out financial irresponsibility, but sometimes there's no alternative.

Those opposed to any government initiative to rescue the market before 2 million loans adjust to a higher interest rate –– and borrowers are stuck with payments they cannot afford –– are forgetting that the ripple effect of not doing anything could seriously hurt the general economy.

That's because the financial system is interconnected. Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy them. So when a homeowner defaults on his mortgage, a retiree might take a financial hit.

True, some of these shady subprime operators bent rules and even lied to sell these dubious loans, and some borrowers fell for it or made bad financial choices, knowing better.

But the subprime crisis has been harsh on some of these parties. More than 90 subprime lenders have been put out of business, according to the Center for Responsible Lending, PBS reports. Big mortgage companies like Countywide Financial are suffering. Borrowers have also lost, as evident from record foreclosure filings, hitting Florida with the third highest foreclosure rate in the nation.

Those who say that Congress and the government should not intervene also forget that what is being proposed is not a bailout at the taxpayers' expense. What is being suggested is the freezing of interest rates or relaxing of bankruptcy rules.

We also hope the government strengthens borrowing rules so that the subprime crisis does not repeat itself.

When no income verification loans and three-year balloon payments become more of a norm rather than the rare exception, something is wrong.

Had the federal government intervened earlier when all this madness was going on, things would not have been so bad.

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