From the St. Louis Post Dispatch:
As homeowners by the millions fall behind on their subprime mortgages, cries for a government bailout are starting to echo through Washington. That would be a very bad idea. It would reward irresponsible lenders and leave the taxpayers holding the bag. Rescuing the irresponsible only leads to more reckless lending.
But there are things that government should do to ease the crisis and prevent a repeat of the current mess. For starters, Congress and the White House could light a fire under the moribund Federal Housing Administration.
Subprime loans are made to people who can’t qualify for prime-rate mortgages. Generally these are people with poor credit, little savings or not enough income to safely support their home loan.
Long before the subprime lending industry sprang up, such loans were the province of the Federal Housing Administration. The FHA insures mortgage loans made by private lenders. That allows borrowers to borrow at rates 3 percentage points below comparable subprime loan rates. But the FHA bureaucracy long ago became sluggish and unresponsive. Until last year, it required lenders to send bulky loan applications in by mail, while subprime lenders often approved loans quickly and electronically. The FHA also was extremely picky about home inspections, insisting, for example, that missing doorknobs be fixed before it would approve a loan.
The FHA also wants permission to make no-down-payment loans and charge higher fees to riskier borrowers; that would let it compete more directly with subprime lenders. But Congress should be wary here lest the FHA wind up in the same sinking financial boat as subprime lenders. The FHA’s foreclosure rate is 2.19 percent, compared to 4.53 percent – and rising – for subprime loans.
Over time, the subprime crisis should be largely self-correcting. Lenders and their investors are taking a financial whipping they won’t soon forget. As a result, underwriting standards are rising sharply, and fewer shaky loans will be made in the future.
Government generally should take a light hand in regulating lending, lest it unintentionally cut off credit on which the American economy runs. But government could and should rein in some of the sleazier practices in the subprime industry, including predatory loans laden with useless fees and exorbitant interest rates that push borrowers inexorably toward foreclosure.