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Fixing the Foreclosure "Crisis" in Exactly the Wrong Way

In the early 1970s, after the go-go 1960s, President Nixon vainly hoped to curb inflation and head off a looming recession by freezing prices and interest rates. Overnight, inflation skyrocketed and when interest rates were unfrozen they immediately followed the rising inflation and unemployment rates into the double digits. Compounded by rising energy prices (sound familiar?) and the loss of jobs to overseas competitors (sound familiar?), this led America into a nearly twenty-year period of economic recession and stagnation.

In a case of dj vu all over again, Philadelphia, PA recently ordered residential mortgage lien holders to cease all foreclosures. Imagine you are a homeowner in Philadelphia today, one who's been sacrificing to faithfully meet the payments on your mortgage for the past ten years. Now, all around you your neighbors are buying new cars and going on expensive vacations. Why? Well, because they've just had their mortgages forgiven. When your city is forcing mortgage companies to give away free houses you'd be a fool to keep making payments.

Philadelphia is not alone. On news of what's happening there, cities everywhere have announced that they are working on similar schemes. Politicians across the country, pandering to the media, are scrambling to make it appear as if they too "care" enough to do something about the so-called real estate and mortgage "crises." One proposal will force mortgage lenders to roll back the interest rates on ARM, HELOC and other risky mortgages to today's best non-qualifying fixed-rate, giving preferential treatment to borrowers who couldn't qualify for a better program in the first place. Yet another will force lenders to re-calculate mortgage principal to the value of the house today, rather than the value of the house two, three or five years ago when the mortgage was taken out. Funny, I don't recall an 11th Commandment that said, "Real Estate Prices Will Never Fall." But why stop with real estate? If you lose your kids' college tuition in Vegas, shouldn't the government pay off the casino? If you lost your shirt day trading or investing in a car that runs on water, shouldn't Uncle Sugar cover that, as well? What about that loan you made to your brother-in-law in 1982? Did he ever make good on that?

It's not a matter of sympathy for mortgage lenders, either. Many of them deserve to go out of business-and they are. In droves. These proposals take political meddling

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