In his new book, entitled “Positively American,” Chuck Schumer wants you to know that he has a vision. Yes, in between leading efforts to block conservative judges and attack presidential appointees at every turn, the bare-knuckled <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />New York senator and chairman of the Democratic Senatorial Campaign Committee has given some thought to “creating a positive message.” One, he says, that will “deliver results for -- middle class Americans."In the book, Schumer acknowledges that his party regained Congress in 2006 mostly due to Republican missteps that Democrats exploited. But he also recognizes that negativity will only get a party so far, and that Democrats have to tailor a message to a middle class that is still suspicious of the big-government liberalism the party is associated with. And he concedes that some in his party have trouble relating to middle-class voters.So he creates for the Democrats some imaginary “middle-class” friends: Joe and Eileen Bailey of Massapequa, New York, a couple in their forties with three kids. The Baileys, Schumer writes, work hard and "believe that everyone deserves a fair chance." At times sounding more like a semi-moderate “Blue Dog” Democrat than the liberal that he is, Schumer says of his imaginary couple: "They don't mind the government's help, but they hate it when politicians condescend to them. They're proud of what they've done and what they've accomplished and they don't need government to treat them like basket cases." But in one of the first bills he has introduced since the Democrats took control of Congress, Schumer ignores his own advice and looks down his nose at the Baileys as well as real middle-class families. Schumer’s bill condescends to the middle-class voters worried about housing market woes. Using concerns about subprime loans for lower income homebuyers as a pretext, the bill treats all families like basket cases and assumes that they are incapable of choosing the home loan that fits their needs. While the message Schumer repeats in his book is "it's the middle class, stupid." the message underlying his paternalistic Borrower’s Protection Act of 2007 is "the middle class are stupid."The cornerstone of Schumer’s bill, according to his press release, is “a suitability standard for borrowers” so that mortgage providers “will never issue a loan that the borrower cannot afford.” With this bill’s promotion of the paternalistic concept of “suitability,” Schumer and fellow Democratic senators Bob Casey and Sherrod Brown of Ohio go beyond the widely shared-goals of improving disclosure of the terms of subprime and other new types of home loans. Rather, the bill bans banks and other mortgage lenders from issuing loans that the government deems as “unsuitable” and beyond borrowers’ means. This must be done, Schumer says, to protect the “large number of financially unsophisticated borrowers.”Just how the federal government, which most of the time spends and borrows its own funds with less judgment and maturity than the average four-year-old, can determine which loans are “suitable” for adults in the private sector, the bill does not say. Nevertheless, imposing an arbitrary “suitability” standard for consenting borrowers and lenders has long been a goal for those on the Left like Rep. Barney Frank, D-Mass., now chairman of the House Financial Services Committee, as well as the folks at the preeminent liberal think tank the Center for American Progress and self-styled consumer groups promoting what Margaret Thatcher called the Nanny State. And all too often these guys don’t even hide their beliefs that ordinary Americans need to be protected from their own stupidity.On the House side, Frank has a similar complaint. “People were put into home ownership who just economically should not have been there,” Frank told the Reuters wire service. “Not everyone is ready.” And like Schumer, the Congressman wants the government to be the ultimate judge of who of us is “ready” to make the decision to buy a home. One “pro-housing” advocate quoted in the article didn’t even try to hide his views that the government should treat borrowers as infants. John Taylor, president of the National Community Reinvestment Coalition, told Reuters: “Is it paternalistic? Call it what you want. I don’t care. I’m not running for office. I just want to keep people in homes they can really afford.”Adding to the push for this type of nannyist legislation is the media’s alarmism over the housing “crisis.” Typical stories will focus on one foreclosure, or one borrower that got in over his head with a home equity loans or an interest-only or adjustable rate mortgage. They will then paint this as typical of all borrowers, who are just dupes of greedy industry.
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To be sure, there are borrowers who have not understood the terms of loans. And there are lenders who have been deceptive, in which case the answer is to enforce the numerous anti-fraud laws already on the books. But unlike the villainous bankers in movies, real lenders don’t make money having to foreclose. In fact, they can lose 30 to 60 percent of the outstanding loan balance because of legal fees and property expenses associated with foreclosure, according to a 2003 Federal Reserve study. Thus, banks have every incentive to ensure borrower have an ability to pay back a loan and to help them avoid foreclosure.Also contrary to the media’s portrayal, there many savvy families who have used these new loans to achieve important financial goals. Many parents, for instance, are taking out home equity lines of credit to finance children’s college education. No less than Money magazine has called this the “cheapest and most convenient choice,” with interest rates lower than even those for federally subsidized higher education loans for parents. Many have also utilized these new types of home loans to provide cash or free up money to start or expand a small business. In fact, interest-only loans and adjustable-rate mortgages have been around as financial tools for the wealthy many decades before advances in risk profiling made them available to everyone. But in the name of “protecting” the middle class, Schumer and Frank would foreclose these options that have benefited so many families. The sharp limits in credit that would result from their “suitability” mandates would likely cause home sales to drop even further, making a housing crisis a self-fulfilling prophecy.The irony is that liberal Democrats like Frank and Schumer used to complain that lenders weren’t providing enough credit, particularly to underserved communities. They pushed through quotas and mandates like the Community Reinvestment Act, forcing banks to provide loans to those with higher credit risks. Getting rid of mandates like this, as well as general measures to keep the economy healthy like preserving President Bush’s tax cuts and repealing growth-inhibiting laws like Sarbanes-Oxley, would be the best policies to keep the housing market running smoothly. But Schumer’s proposal for loan “suitability” is a concept that’s simply unsuitable for consenting adults in a free society. Republicans and others who value freedom for families must carry the battle against this blatant paternalism.