I'm a Pundit Too

Thursday, April 12, 2007

Lawmakers Propose Aid for Subprime Borrowers

We all knew that this was coming. Time to bail out subprime lenders because they were too busy acting like idiots to conduct good business. Good old Chuck Schumer, who sits on economic committees despite not knowing anything about economics, has decided that the feds need to use your tax bucks to bail these guys out.

Due to the fact that the federal government is busy putting really stupid corporate regulations in place all over the US, they missed something that they should actually regulate. The Adjustable Rate Mortgage (ARM). It needs to be regulated because 99 percent of the people who get an ARM have no idea how it works. They don't understand that when the fed rates are sitting at all time lows, they will eventually be raised again. And I don't expect most people to understand how this works. Very few people have any real grasp of economic policy, they just want to buy house for the family. They are thinking about buying a house, not about what Bernanke will do at the next fed meeting.

Mortgage brokers don't care about the financial stability of the buyer or the lender. So they wow the buyer by showing them how to get their hands on the overpriced house at a low monthly payment. They gloss over the fact that the rates WILL rise and that the monthly payment could more than double within 5 years or so.

So this is what we will be dealing with. Our tax dollars will be used to finance companies that used bad ethics and bad business practices, which of course is right on par for the federal government. This will undoubtedly lead to very ridiculous mortgage regulations that will be passed in the name of protecting the “little guy”. The reality is that long ago we should have had regulation that forces the lender to detail in writing the risks associated with the Adjustable Rate Mortgage. It could easily be an attached document that spells out the fact that the rates will very likely force the monthly payments to increase severely. It should also be disclosed in all advertisements for those super low payments. And there should have been very close scrutiny over this document to prevent the slick broker from getting a signature without the buyer actually reading it. Yes, this would have prevented a lot of people from signing. That would have been a good thing. It would have kept the housing market on a more even path. Instead, we had an overblown housing market that blew up in our faces and may cause a recession. Very similar to the tech and stock market boom of the 90s. We let every Tom Dick and Harry log into his computer and buy tech stocks online. This sent the stock of perfectly useless companies soaring. Companies that didn’t even have realistic, profit focused business plans had incredibly high IPOs.

I hope that cooler heads will prevail here, but I know the way our government acts when faced with these things. Another problem we get when we put lawyers in charge of economics.

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