Bush and Subprime

President Bush unveiled his mortgage relief plan today.  He’s decided to freeze the mortgage rates of perhaps hundreds of thousands of speculators and homeowners who might otherwise not be able to make their loan payments.  Some have argued that the plan is fine because it uses no federal funds. Not so, says the Washington Times:

While no taxpayer money at the federal level will be involved in a bailout, the administration seems intent on using state and local taxpayer funds. After all, without these taxpayer-redeemed bonds, the funds to make the mortgage refinancing happen would not be available.

In the Washington Post, my former colleague John Berlau says that it’s not even a bailout — it’s worse.

“In some ways it’s worse than a taxpayer bailout,” said John Berlau, director of the Center for Entrepreneurship at the institute. “It pressures an industry to essentially alter the terms of millions of contracts, and it’s going to make investors think twice about investing in America again.”

There’s little question that subprime fallout will have consequences for some people, but I think the "crisis" has been overstated. Subprime loans only make up a small portion of overall mortgages, and even within that small portion, it’s a fairly small number that are in trouble. Roughly 85% of subprime mortgages, in fact, are in good standing, and of the total mortgage market, only 5% of are facing difficulties. Moreover, as the Post piece points out, it’s unfair to those who chose not to overextend their finances, and, overall, a poor signal to those who’ve made rash purchases that the government will pony up taxpayer money whenever they’re in trouble.