Mortgage Sub-Prime Crisis Examined in New Report

Washington, D.C., November 8, 2007—As Congress scrambles to "fix" the sub-prime crisis that’s plunged mortgage lenders into bankruptcy and homeowners into trouble, a new report by the Competitive Enterprise Institute explains why Americans are better off if Congress keeps its mitts off the problem.

The various proposals in Congress are "unlikely to provide relief to homeowners in trouble and may even make things worse," explain CEI analysts Eli Lehrer and John Berlau in “A Non-Prescription for Confronting the Sub-Prime Crisis.”

"To date, the crisis has been relatively minor—a small decline in homeownership combined with a small uptick in foreclosures, with well-off investors absorbing the bulk of the damage," say Lehrer and Berlau. "Doing too much could turn a minor crisis into a major one affecting ordinary Americans."

The report comes in advance of a likely vote in the House of Representatives on the "Mortgage Reform and Anti-Predatory Lending Act of 2007" (H.R. 3915), which would mandate that lenders only offer loans that the government determines have the "best terms" and "net tangible benefits" for borrowers. Lehrer and Berlau blast the paternalism of the bill’s approach and point out it could worsen the housing crisis by making it harder to get home loans. "This and similar proposals would go beyond improved disclosure to essentially outlawing certain types of loans … limiting the choices of both lenders and borrowers," the authors explain. "A mandated ‘cheaper’ loan that requires larger cash payments at one time may hinder borrowers’ abilities to achieve other financial goals, such as sending a child to college."

Arguing against both overregulation and bailouts from agencies such as the Federal Housing Administration, the authors conclude that these interventions will worsen the market’s ability to correct the problem by re-pricing risk. "The failure of hedge funds and mortgage firms sends a clear signal indicating bad business practices," the authors explain. But many of the proposed ‘solutions’ would likely both "increase default rates" and "make it impossible for some people to afford homes."

Read the report A Non-Prescription for Confronting the Sub-Prime Crisis: Congress Should do Nothing

Author Bio

Eli Lehrer is a senior fellow at CEI, where he directs CEI’s studies of insurance and credit markets.

John Berlau is director of the Center for Entrepreneurship at CEI

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