Victims and villains


Victims and villains

Apr 10th, 2008 6 min read

Former Distinguished Fellow

Ernest served as a Distinguished Fellow at the Heritage Foundation.

The media have Mortgage Madness, and politicians have caught it.

We're talking about the burst housing bubble and its aftermath: tumbling house prices, rising mortgage delinquencies and increased foreclosures.

It's a mess. In typical fashion, the left has waded in, labeling some as "victims" and others as "villains." The next step, of course, is to exploit sympathy for the victims to create more government spending and to translate outrage at the villains into additional regulation. Any who fail to play along are condemned as uncaring cretins.

It has been hard to rally opposition because many conservative pundits are focused on the presidential campaign and the war in Iraq, even while the left has pushed a crisis mentality to advance what former House Majority Leader Dick Armey has labeled, "Subprime Socialism."

At stake for taxpayers are hundreds of billions of tax dollars - and the principle of self-responsibility. It starts with a plan that "only" spends tens of billions, mostly to help the housing industry - but that's only Round 1. Once businesses are helped, Round 2 would be the costlier plan to bail out individuals who made bad decisions.

The effort to shift mortgage losses onto the backs of taxpayers remains super-strong in Washington, but is finally meeting resistance.

Senators were in a bipartisan stampede to approve the first round of the bailout. They were startled when House Republican leaders and the White House suddenly dug in their heels.

Until that happened prospects for a principled stand looked bleak. Aggressive liberal bailout plans were being met in traditionally conservative corners of the Capitol with silence and acquiescence. Only a few lonely voices had the courage to speak against an expensive bailout.

That began to change Tuesday, when White House Press Secretary Dana Perino told reporters, "The bill will likely do more harm than good by bailing out lenders and speculators and passing on costs to other Americans who play by the rules and honor their mortgage debt obligations."

Almost simultaneously, House Republican leaders released their statement of principles, including these key items:

  • Fairness for Responsible Homeowners. As a matter of fairness, we should stand up for Americans who saved and invested responsibly, not reward reckless behavior at the expense of those who did the right thing.

  • Protection for Taxpayers. We should protect taxpayers from having to bail out speculators and scam artists.

  • Stake in the Outcome. Anyone receiving government assistance should have to make a financial sacrifice and have a stake in the outcome.

(A word of caution, though. House GOP leaders did not disavow the possibility that they might go along with some sort of multi-billion-dollar package, nor did the White House.)

Prior to these welcome statements, it was difficult to find opposition to a huge bailout package - but not impossible. Columnist John M. Berry went after the blatant unfairness of giving a major tax break solely to the irresponsible:

Suppose you're trying to sell your house when a similar home down the street has a sign in its yard proclaiming, "Foreclosure. Priced to Sell.''

You're probably already upset because the foreclosure likely has driven down the value of homes in the neighborhood. Then you learn that a law has just been passed giving a $7,000 income tax credit to anyone who buys a foreclosed property, further undercutting your asking price.

The Washington Examiner went after Rep. Barney Frank, D-Mass., for proposing billions of tax dollars to buy down the debt on delinquent loans:

Remarkably, his proposed terms are so lenient that Rep. Frank himself has worried aloud that some perfectly solvent borrowers might "purposely default" in order to qualify for the new deal. How this approach can possibly stabilize home values is beyond us. It is more likely to cause a race to the bottom that will delay, not hasten, any recovery.

An op-ed from the Manhattan Institute made its way into the New York Post, condemning another part of the Senate bailout legislation because, "The $4 billion in block grants would let cities and states buy properties from grateful banks at still-inflated prices - a plunge into the property-ownership and landlord business, at which government has never excelled."

The Heritage Foundation worked tirelessly to educate elected officials and opinion leaders about the negative impact of not letting the free market system sort out the problem, rather than bailing out the irresponsible and making the responsible pay for it. Congress' proposals were summed up in one of its papers as "a number of new federal spending and credit programs that would greatly expand the role of government in the economy while doing little to alleviate the distress caused by the financial crisis."

While the right has struggled to rally opposition, the left was getting more aggressive - readying to push Frank's ultra-expensive bailout plan plus new legislation to go even further, as Congressional Quarterly noted:

While the Senate is expected Wednesday to pass its package (H.R.3221) of business tax breaks and incentives to buy foreclosed properties, the House Ways and Means Committee will take another tack: approving legislation that includes zero-interest loans for first-time homebuyers and money to build low-income housing.

Mainstream media pitched in with stories arguing that we shouldn't fret when undeserving folks get bailouts. One writer penned an historical analysis of government bailouts, concluding:

In almost every instance, a simple calculation tipped the balance in favor of action: Although some who were undeserving might end up being helped along the way, the benefit to society as a whole was simply too substantial to ignore.

The same writer sought to perpetuate the notion that many people who borrowed money were victims, saying, "Many of those who bought or refinanced their homes with sub-prime loans were victims of overzealous loan brokers paid on commission."

That attitude treats mortgage lenders as high-pressure, door-to-door salesmen who foist products on frazzled consumers until they buy something just to get the hucksters to leave. Yet nobody forced homebuyers to take money they didn't want. Some lenders may have been complicit in helping buyers falsify loan applications, but that only makes them as guilty as the borrowers. It doesn't make the borrowers innocent victims. Lying to get a loan is theft, which is why the penalty is so steep - up to 30 years in prison and/or a $1-million fine.

This fight is about more than money. We're still weeks away from a conclusion, and the prospects are not good that the mad rush to "do something" will be halted. As one friend put it, perhaps Congress will do "nothing more than waste money," without doing the worse damage of permanently wrecking our market for home ownership.

But make no mistake. If Congress passes a bailout, it will be rewarding bad behavior with subsidies taken from honest, responsible taxpayers who didn't play the game of no-cost homes and easy profits.

The best approach to Mortgage Madness is still to let the free market system work. Only when those who make bad decisions pay a price will they change their behavior for the better.

Ernest Istook is recovering from serving 14 years in Congress and is now a distinguished fellow at The Heritage Foundation.

First appeared in World Net Daily