Why State-assistance for subprime mortgages makes good economic sense...

Matty at RAB keeps up his 1.000 perfect hitting average of opposing anything proposed by the Strickland Administration, no matter how reasonable and pragmatic it may be. This time, it's the new initiative to give some Ohio families the opportunity to refinance their homes with assistance from the state to avoid foreclosure caused by escalating monthy payments caused by rising monthly interest rates in subprime mortgages.

Matty, with his conservative Strickland hating myopia cries:

The state should not start issuing loans to anyone, and it is very difficult for me to blame anyone except the home owner for taking out subprime loans that they couldn't afford. How far can government go to protect people from their own incompetence?

The way to fix the "foreclosure crisis" is to cut taxes and to pass policies which extend economic freedom- Only then, will Ohio's economy turn around and produce the type of higher paying jobs people need to pay for houses.

Where to even begin? Well, first, according to the very Dayton Daily News story linked by Matty, the program requires beneficiaries of the program to undergo credit counseling. Second, I find it ironic that a person who reguarly advocates legislative actions to limit the monetary liability of manufacturers who have placed defective or dangerous products into the stream of commerce suddenly is an advocate for responsibility.

Third, tax cuts won't solve the problem. Matty ignores the obvious that after massive federal and state tax cuts have been enacted, the state is still facing a foreclosure crisis. (Under Republican rule, Ohio cut its personal income tax some 21%, and yet continues to lead the nation in foreclosures.) Second, most of the people vulnerable to foreclosure pay little, if any, income taxes at all. There's not enough tax liability to cut in order to make decreases in tax liability offset increasing housing costs caused by rising subprime mortgage interest rates. Fourth, tax cuts won't provide real relief for another year, unless both the state and federal government offer "rebate" checks. And, of course, the obvious question is: if Mattie thinks government shouldn't provide loans to "protect people from their own incompetence" why should we then reward them with tax cuts? And how is this not a program that, in fact, is a policy which extends "economic freedom" when it gives familes the opportunity to own their own home and avoid bankruptcy?

And the most obvious flaw is that subprime mortage borrowers are not solely to blame for the foreclosure crisis. In fact, inequities in the market are directly to blame, as is the Republican General Assembly slow and ineffective response to predatory lending. With builders, mortgage lenders, mortgage brokers, and mortgage-backed securities investors all focusing on chasing the quick commission/return investment dollar, the industry as a whole has a short-sighted financial incentive to get consumers in financially irresponsible loans because the market permitted many of the front-end economic actors to focus on getting the commission now and passing the risk later down the chain to the willing mortgage-backed investor who was demanded more and more in what was being treated as a never-ended housing market utopia.

Foreclosures hurt more than just the family who loses their dream home. They hurt lenders who lack capital for future investment. Foreclosures depress housing prices, depress new home construction, and lead to further foreclosures as depressed property values cause even more families to realize they owe more than what the house is worth, have little to no equity in which to leverage refinancing right at the same time as interest rates in the mortgage are about to increase substantially. Increases that families were lead to believe could be covered by real estate appreciation and personal income growth that never materialized. Depressed property values lead to less money for schools and other local governments, causing the state to slide back even further.

What economic recovery we had during the first term of this Bush Administration was not attributable to the Administration's tax polices nearly as much as it was by the housing market. With interest rates still at historic lows, homeowners acquired massive capital for reinvestment and consumption by refinancing or tapping into their real property's equity. Far more capital than they acquired from tax cuts.

Instead of waiting for expensive tax cuts to take effect, the Strickland Administration is immediately offering to provide lower-interest loans which will avoid foreclosures, break the economic cycle caused by them, restore consumer and investor confidence by taking some of the risk exposure in the market and replacing it with debt guaranteed with the full faith and credit of the State of Ohio.

Of course, the State's debt rating has taken a hit from all of the tax cuts Ohio's Republicans have passed that have failed to stem the tide of foreclosures. Replacing subprime mortgages with these state-backed low-interest mortgages addresses the problem head on. We've tried tax cuts. They didn't work.

And if Matty would read any economic news lately, he'd realize that there isn't a foreclosure "crisis" but a genuine one that is zapping consumer confidence and the equity markets which drive our economy. Perhaps Matty should read:

• Consumer confidence falls sharply: "Rising defaults and delinquencies in subprime mortgages and fewer home equity withdrawals that give consumers extra cash could curtail spending."
• Stocks tumble amid economic worries: "Stocks stumbled Tuesday as investors grew wary when new data raised the possibility that the nation’s weak housing market would seep into the broader economy and crimp consumer spending.

  A housing index released Tuesday by Standard & Poor’s showed that prices of single-family U.S. homes fell in January compared to a year ago, in their worst showing since January 2004. Also, Lennar Corp., one of the nation’s largest homebuilders, said its first-quarter profit plummeted 73 percent and warned that it probably won’t meet its 2007 earnings guidance.

  Wall Street has been nervous lately that a drop in housing values will further weaken subprime mortgage lenders, who make loans to people with poor credit, and make consumers feel less wealthy and rein in spending. Consumer spending makes up about two-thirds of U.S. economic activity."