Politics & Policy

Of ARMs and the Man

A misunderestimated president is fixing our adjustable-rate-mortgage problem.

‘I sing of arms and the man” is the opening phrase of Virgil’s Aeneid, the story of how Aeneas founded the small colony that would ultimately become the Roman Empire. Our current real-estate challenges are not remotely as epic. I will, however, sing of the president’s achievement. George W. Bush, alongside his Treasury man Henry Paulson, has managed to midwife a sub-prime rescue plan that pleases homeowner groups, investors, and loan servicers, all at the same time. And it was done via convention, not coercion.

Not everyone will sing such praise. The hard Left will carp because the bankers don’t get punished in this plan (even though these very same liberals were the ones who forced the banks to make these risky loans in the first place). The Ron Paul Right will gripe that government shouldn’t play a convening role, and that the “sanctity of contracts” implies that contracts cannot be voluntarily renegotiated (even though no less an authority than the U.S. Constitution endorses the right to bankruptcy).

Green-eye-shade types will scrutinize the spending in the rescue plan. Let them: Taxpayers aren’t footing the bill. Not for the interest-rate freeze. Not for the Federal Housing Administration, which is self-supporting. The FHA is currently forbidden to charge premiums based on risk, which means it is currently obsolete. What’s anti-market about allowing the FHA to charge market rate for mortgage insurance?

Market purists may well object to the provision that would permit individual states to issue tax-exempt bonds to help people refinance their mortgages. Currently, they are allowed to do this; it’s in this way that they help people get into homes. So I don’t see much of a philosophical shift in allowing the same program to keep people in homes. Yes, the use of tax-exempt funds is something of an indirect subsidy. So what? We do the same for hospitals, airports, and stadiums. Why not for distressed homeowners?

Perhaps this is an ideological divide. I am a Republican, not a libertarian. The founder of my party, Abraham Lincoln, signed the Homestead Act which essentially gave massive amounts of property away to families on the frontier. The mortgage interest deduction is among the most accepted elements of our tax code and has been for decades. So, yes, we want people to own property and we help people (just enough) to do it. The social benefits are overwhelming: lower crime rates, higher social capital, rising property values. We settled this a long time ago. If you don’t like it, take it up with Honest Abe.

Angry middle-aged men of various genders and durations will fill cyberspace with howls of outrage over the president’s rescue plan. “I’ve been responsible. Why can’t I get a deal like this?” The answer is that you can get a deal like this.

There is a robust American market for the refinancing of mortgage debt, and you can take advantage of it at any time. The president’s plan doesn’t change that fact, it just speeds things up. There’s nothing that’s going to happen here that wouldn’t already have happened without the plan. Homeowners would have worked things out with lenders; there would have been freezes; there would have been re-financings. The problem is that ARM resets were coming so quickly that the system was getting clogged. So the government brings the whole industry into the same room where they work out new practices such that these work-outs can be performed in bulk. Kennedy did this when our steel industry seized up. While our infrastructure is made of data, and not iron, it’s the same principle.

Bush, along with his Treasury man, did right by America. This was indeed a presidential moment. Our first MBA-owning chief executive didn’t let us down.


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