Politics & Policy

Helter Shelter

Why are mortgage lenders hiding under their desks?


What are they afraid of? The economy is solid. There’s plenty of investment capital out there. People want homes; mortgage applications generally have been going up. And the Federal Reserve has been doing its job, opening the discount window to troubled banks.

So, what are they afraid of? Why won’t the lenders lend?

Answer: Because Congress is on the case.

The Democrats are drooling over the credit “crisis,” to the point where you can practically see the slobber stains on Barney Frank’s article in Tuesday’s Financial Times, a predictable cry for more regulation. Frank isn’t some public-interest law-firm guy with a ponytail, like those who have been busy placing pro-regulation op-eds in newspapers around the country. He’s the chairman of the House Financial Services Committee. He’s a guy who matters, and he sees the sub-prime episode as an opportunity to extend his regulatory fiefdom from banks to any institution that originates a mortgage. He also spies a chance to move away from homeownership for the poor and toward public and subsidized housing.

There’s political capital in houses, and members of the House know it. So do members of the Senate. Chuck Schumer is working on the kind of legislation that places broad and vague obligations on mortgage originators. Other legislators are talking about criminal penalties for “predatory lenders.” Can you see the perp walks? The Democrats can. That’s why the lenders aren’t lending.

The sub-prime problem never had to do with the default rates among sub-prime borrowers. As I (and Larry Kudlow and Ben Stein and Neil Cavuto) have been saying over and over, that market just isn’t big enough.

The problem is fear of backlash. Whether the issue is “managed earnings,” as in the case of Enron, or backdating options, as in the case of Apple, there is a pattern. A market corrects, people who are long on that market get hurt, the media blows the issue vastly out of proportion, politicians grandstand, Congress over-regulates, and a cloud of lawyers comes swarming across the plain laying waste to everything in sight.

Speaking of lawyers, the Wall Street Journal has reported the emergence of the first “issue-focused” practice group dedicated entirely to sub-prime mortgage issues. Over at the D&O Diary, a blog written by attorney Kevin LaCroix, you can find a tally of class-action lawsuits against sub-prime mortgage originators. We’re up to ten already. Count ’em, ten.

The SEC has been looking very hard at sub-prime issues. Were investors sufficiently informed of the risks? Were some mortgages, which are now seen as sub-prime, accounted for as lower-risk?

And when it’s mega-bank versus single mom in front of a jury, who do you think will win?

It won’t be about law at that point. It will be about envy. Given the class-warfare mood of the media and much of the political culture, is it a shock that mortgage lenders are hiding under their desks in the fetal position?

All of this is why this is a presidential moment. The Fed has done its job (or at least most of it) by injecting liquidity and relaxing its discount rate for loans to member banks. Now it’s the president’s turn. George W. Bush must brandish the veto pen once again. The last time he did so, the market saw triple-digit rallies. The issue then was tax hikes on private equity. This time the president must make perfectly clear that he will veto any legislation that threatens the health of the housing market. No Sarbanes-Oxleys for home credit; no trial-lawyer open season on mortgage originators; no overzealous regulators treating judgment calls made in good faith in a strong market as crimes against humanity in a down market.

Ultimately it will be up to the president to stop the Congress from turning a correction into a catastrophe.


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