The Liberty Papers

The Bush Administration appears to be on the verge of proposing a bailout in response to the subprime mortgage crisis:

Treasury Secretary Henry M. Paulson Jr. unveiled new details of the Bush administration’s mortgage-relief plan yesterday, including a proposal that would grant new powers to local governments to refinance the mortgages of struggling homeowners.

Paulson spoke publicly for the first time on the strategy that would temporarily freeze interest rates for many troubled homeowners or help them refinance, a plan that is gaining momentum among federal regulators, leaders of the mortgage and housing industries, and lawmakers of both parties as the mortgage crisis worsens.

And the details of that plan, it seems, essentially would be to allow borrowers to re-write the terms of their loans and shift risk more decisively to lenders, who traditionally use things like higher interest rates to account for the fact that a given borrower is a high credit risk:

Many homeowners with subprime loans could apply to freeze their rates or refinance their loans quickly under the deal being worked out by Treasury officials and the Hope Now Alliance, a coalition of consumer counseling groups, investors, nonprofits, and lenders such as Citigroup, Wells Fargo and Countrywide Financial.

The major sticking point is the investors who buy securities made up of subprime loans. For years, they provided the financial backing that allowed mortgage firms to expand their lending. No type of loan made more money for investors, or was as risky, as subprime mortgages, because they required homeowners with shaky credit to pay more interest.

If lenders agree to freeze loans at lower rates, investors would lose out on the higher payments promised under the original loans, which could give them grounds to sue the lenders.

“While the devil in the details, this is the first time the administration is devising a plan that meets the magnitude of the problem,” said Sen. Charles E. Schumer (D-N.Y.). “If investors can be compelled to go along without long legal delay, it has the potential to make a real dent in the problem.”

In other words, let’s screw the investors.

I’ve said it before, and I’ll say it again — the only “problem” that exists in connection with the subprime mortgage crisis is the fact that it is the inevitable outcome of two bad ideas. First, for nearly a decade we were living in a real estate bubble where housing values were rising at rates that were, to any rational person looking at the numbers, not sustainable. Second, in part because of the housing bubble and in part because of simple bad decision making, people were buying houses they really couldn’t afford and entering into loan transactions that were not in their best interest. As a result, when the bubble popped and rates started rising, people started defaulting on their loans.

None of this should come as a surprise, and the rational response to all of this should be to let the situation play itself out. Instead, everyone involved — Congress, the White House, Wall Street, the banks, and the real estate industry — wants to come up with a plan to delay the inevitable reckoning that we’re already in.

And this is coming from a Republican President and a supposedly conservative Treasury Department. I’d like to say that I’m surprised, but I’m not.