Q&A Friday #83: Who Carries The Most Responsibility For The Subprime Mortgage Fiasco?

Question: “Who carries the most responsibility for the subprime mortgage fiasco, the banks who made loans to those with questionable credit, or the people who bought houses they couldn’t afford with adjustable rate mortgages?” — President_Friedman

Answer: There’s a lot of blame to go around in this situation because pretty much everyone involved was at fault. But, let’s start from the beginning.

Whenever you have a major economic screw-up like this, the root cause is usually the government mucking around in the marketplace. That’s the case here, as well.

Here’s Thomas Sowell explaining the government role in this mess,

Congress and the Bush administration are currently 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 to buy a house 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.

Study after study has shown that housing prices are highest where government restrictions on building are the most severe. That is 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 would not invest otherwise. Government also created the temporarily very low interest rates that made the mortgages seem affordable for the moment.

Of course, the people making the loans aren’t blameless either. They should have been much more cautious about handing out money to borrowers who couldn’t make the payments.

But ultimately, the people who are most at fault are the folks who took out the loans. “If you can’t afford it, you don’t deserve it,” and if you take out a loan on a house that you can’t afford, you shouldn’t blame anyone but yourself when that, very predictably, comes back to bite you.

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