Taxpayers Shouldn’t Be Held Liable For Bad Decisions By Borrowers Lenders

Nearly two million homeowners have mortgages whose rates will adjust upward by the end of 2008. The Federal Housing Authority estimates that 500000 could go into foreclosure. The response by Democrats seems to be best expressed by the chairman of the Joint Economic Committee of Congress Senator Charles Schumer of New York who earlier this year was joined by senators Robert Menendez of New Jersey and Sherrod Brown of Ohio in supporting the use of hundreds of millions of taxpayers’ dollars to prop up sub-prime borrowers. This "No effort should be spared to save everyone who has taken out a risky loan" approach is not so far from promising everyone a free house. Back in the real world Republicans have traditionally favored a free market approach but with polls showing the party at risk of losing more seats in the 2008 elections a rush is on to appear to be actively seeking salvation for those who have taken on exotic loans.

The president is trying to cut the baby in half and has succeeded in getting lenders to agree to freeze mortgage rates for some of the most vulnerable borrowers for five years. Bush claims that because the agreement was reached "voluntarily" this is not government involvement in the market place. But given the prodigious regulatory powers of government even a simple request from the feds gives this "voluntary agreement" a coercive tint.

While the left claims that the government response has been inadequate the truth is that even the president’s simple agreement will have a negative impact on millions of Americans by distorting the market. Those who wisely waited to buy a home until the "irrational exuberance" of the recent buying frenzy subsided now find their plans put on hold as this government action works to keep home prices at an artificially inflated level.

Additionally many taxpayers want to know how many of those who are to be shielded from the impact of their own decisions are actually speculating "house flippers" who were willing to sign virtually any mortgage agreement because with home prices increasing at a double digit annual rate they expected to be able to resell at a tremendous profit in just a few months. In any event what happens after five years if these borrowers are still unable to pay a current rate mortgage?

Even some of those who will be assisted by the mortgage rate freeze may end up regretting it if they find they are just continuing to pay to own more of a declining asset.

Some who argue for even greater government intervention say it is essential to protect the economy but this justification is weak considering that homes that are given up would be resold to new buyers better qualified to pay for them.

Very few taxpayers have sympathy with those in the finance community who engaged in what some have described as "predatory" lending practices. The average citizen believes that lenders due to their greater knowledge have a fiduciary responsibility to borrowers and must be held accountable. Every effort must be made to be certain that a potential homebuyer is fully informed of the risks of taking on a home mortgage especially one that does not build equity or results in much higher payments in the future.

And while most Americans sympathize with their fellow citizens who may be about to rejoin the ranks of renters the question must be asked: Should taxpayers be compelled to make good the bad lending and borrowing decisions by others over whom they have no control?

The answer by most is a resounding no.

Jon Coupal is President of the Howard Jarvis Taxpayers Association — California’s largest taxpayer organization — which is dedicated to the protection of Proposition 13 and promoting taxpayers’ rights.