In Search of a Subprime Free Lunch

The subprime market is a mess. Some of your constituents are losing their homes. There are more of them in the state which you represent in Congress than there are mortgage company executives. So the answer is obvious: propose a freeze on foreclosures and interest hikes through adjustable rate mortgages (ARMs).

That is what Sen. Hillary Clinton (D-NY) wants to do. According to USA Today:

New York Sen. Hillary Rodham Clinton Monday will call for a 90-day moratorium on foreclosures on homes with subprime mortgages and a five-year freeze on the interest rates those borrowers must pay.

In a letter to Treasury Secretary Henry Paulson, who is poised to announce the Bush administration’s response to the housing troubles today, Clinton warns that foreclosures threaten to cause “incalculable” cost to the economy.

Foreclosures are expensive to borrower and lender alike, which is why many companies work hard to keep owners in their homes, especially in a down housing market. But truly “incalculable” is the cost to the rule of law of arbitrarily changing the legal terms of millions of mortgages and absolving homeowners of responsibility for the loans which they avidly sought.

Ultimately, market capitalism can only work if people accept responsibility for their mistakes as well as their successes. What Sen. Clinton is advocating is a form of “heads I win, tails you lose” capitalism. In this case the beneficiaries are troubled homeowners. Next time it could be the lenders or the investors, who also are clamoring for a federal bail-out.

Uncle Sam should stay out and let the market work.