The mortgage crisis — what should be done?

 

As you all know by now, there is a housing crisis in the United States that revolves around shady lending practices by financial institutions, borrowers who should never have been qualified for home loans, and speculation by some who were looking for a quick turnover on their purchases.

Over a very short period of time, the average median price of new homes skyrocketed, and a home that would have sold for $165,000 was selling for $500,000. Then the bottom fell out and homes that were bought for top dollar were depreciating almost as fast as they rose.

 

New home buyers were being qualified without verifying income, speculators were buying homes and reselling them within a few weeks of purchase for large profits, and mortgage lenders were being creative in their financing and then reselling the mortgage paper to other financial institutions.

Hundreds of thousands of new homeowners who would never have qualified under a standard 30-year fixed mortgage were being offered what are called adjustable rate mortgages that allowed them to enter into an agreement with very little or no money down and at very low interest rates.

But those interest rates increased in a very short time and within a couple of years people saw their mortgage payments increase so sharply they could no longer afford the home, and banks or lending institutions that owned such mortgage often were forced to foreclose on the homes.

Now millions of homes are being foreclosed on, which is having a ripple effect on our economy. New home building has greatly slowed, the construction industry is taking a beating, and lenders have been forced to tighten up their credit lending practices.

So what has our government done, or what can they do?

 

First the good news: a few weeks back, Bear Stearns Companies Inc., a major financial institution on Wall Street, was about to go under when JPMorgan Chase & Co., another financial institution on Wall Street, offered to buy Bear Stearns, its competitor, at rock bottom prices. The deal was backed by $30 billion in U.S. tax dollars.

That was a sweetheart deal for JPMorgan Chase, because they face zero financial risk. The $30 billion in U.S. tax dollars was provided to cover any future loss.

The Bush administration is strong on what is called a free market, but if that market is tanking, instead of letting it go out of business, as it should have done in a free market, it forced Americans to pony up $30 billion so Bear Stearns’ competitor could buy it out.

But what about the homeowners who were being put out on the street because of shady lending practices and poor decision making on their own parts? Shouldn’t our government also bail them out? Surely President George W. Bush and Congress don’t want to see millions more Americans become homeless, right?

 

A few days ago the House passed a bill to provide aide to millions of homeowners who are at risk of foreclosure. The bill would allow homeowners to get rid of their adjustable rate mortgages and replace them with federally-backed loans that would be much more affordable.

The bill would strengthen the Federal Housing Administration’s mortgage giants, Fannie Mae and Freddie Mac. The bill also would create a $7,500 tax credit for first time homebuyers.

This bill received bipartisan support in congress. Thirty-four Republicans voted in favor of the bill.

But Bush said he would veto the bill.

Thirty billion U.S. tax dollars to Wall Street, but nothing for Main Street. At least Bush is consistent.