The Mortgage Bubble

The mortgage crisis spreads beyond subprime loans:

At the end of September, nearly 4 percent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association.

That was the highest rate since the group started tracking prime and subprime mortgages separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 percent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in subprime lending during the last few years

Bottom line: many home buyers were seduced by the idea of getting more house for less money even though the math didn't make sense, because they thought the housing boom won't end or at least last long enough until they make a tidy profit and cash out. Lenders, for their own greedy reasons, peddled them loans they simply don't understand or can't afford to pay, barely verifying income and asking for little or no down payment. It was a recipe for disaster.

Like John Aravosis, I don't think every home buyer in trouble deserves a government bailout, but neither do financial institutions whose business it is to know better. Bush is currently pushing a plan where the six biggest lenders will give those who are 90+ days behind on their payments a 30-day reprieve so they can negotiate for a better loan, but there's no guarantee those lenders will give them better terms than what they already have.

No, that's not enough. To avert the tidal wave of mortgage foreclosures we're facing in the coming months, the best solution is to make lenders take their lumps, own up to the crappy loans they've doled out and re-negotiate them by cutting down on the borrowers' debt.

Towards this end, Chris Dodd's proposed Homeownership Preservation Corporation and Homeownership Preservation Act are the better solutions. Not only will the Corporation buy the loans from lending institutions at a deep discount and help buyers keep their homes by restructuring their debt, the Act will also protect consumers and the market from predatory lending practices in the future.

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