Jenkins in the WSJ on the subprime shambles

Holman W. Jenkins, Jr.’s piece in the Wall Street Journal today (“Payback,” subscription required) is a thoughtful and cogent assessment of some aspects of the subprime mortgage market. Jenkins notes that government policy to subsidize home ownership because “homeownership is a social blessing” expanded to focus on getting low-income families into homes they owned rather than rented. However, he points to research showing that those people may have been better off as renters in terms of having greater resources for possible upward mobility for themselves and their families.

Holman also notes that “something” — partly a regulatory and legal problem — is making it difficult for holders of subprime mortgage paper to ask for forbearance on the underlying loans:

The irony is, were the owners of the subprime paper inclined to make themselves known and realize their losses, the majority of these loans would likely end up paying off. Buyers of the severely discounted paper would make a killing and the market’s dispersed decision-making, which recently became its weakness, would return to its normal role as a strength. In any case, subprime lending accounts only for about 15% of outstanding mortgages, with an uncataclysmic $90 billion worth facing foreclosure.

Fluctuations in the S&P 500 wipe out as much wealth every ho-hum day without drying up credit globally. But today’s caginess problem is partly a regulatory and legal problem, because something is clearly stopping holders of temporarily unmarketable mortgage paper from sidling up to their bankers and asking forbearance on the loans financing these positions. The Fed’s announcement of an accommodating discount window last Friday was an invitation to banks to help their clients dig out of these problems. But the Fed can’t make them do so. If prosecutors and class-action lawyers now decide to launch an undiscriminating war on the mortgage finance industry, look out below.