Sub Prime thinking

Thomas Sowell:

IT'S remarkable how many political "solutions" today are dealing with problems created by previous political "solutions." Three examples that come to mind immediately are the housing-market crisis, the wildfires in southern California and the water shortages in the west.

Congress and the Bush administration are vying with each other to come up with a solution to the housing crisis, brought on by widespread defaults on home-mortgage loans - especially defaults by those who took out risky "subprime" loans.

Why were borrowers taking out risky loans in the first place? And why were lenders willing to lend to risky borrowers? In both cases, the government was a prime factor in "subprime" loans.

Many people took out risky mortgage loans because housing prices were so high that this was the only way they could own a home. Where housing prices were highest, the most people took out risky loans.

In the San Francisco Bay area, where housing prices are the highest in the nation, risky interest-only loans went from being 11 percent of all new mortgages in 2002 to being 66 percent of all new mortgages in 2005.

Studies have shown that housing prices are highest where government restrictions on building are the most severe. That's the ugly result of pretty words like "open space."

Why were lenders lending to people whose prospects of repaying the loans were below average - that is, "subprime"?

Government laws and policies, especially the Community Reinvestment Act, pressured lenders to invest in people and places where they wouldn't invest otherwise. Government also created the temporarily low interest rates that made the mortgages seem affordable.

Now that politicians have created this mess, they are ready to play heroes riding to the rescue.

...

In Texas where there are few building restrictions and no shortages of open space, there were apparently relatively few sub prime mortgages and the housing market has not experienced the steep declines that it has elsewhere. It is in fact the restrictions on building that drive up the cost of housing and therefore drive up the need for "innovative" financing. Remove the restrictions and there would be more affordable housing, but those who have already invested at the inflated rate have already invested in the restrictions so they will look for someone else to bail them out.