Sympathy for the Subprimes

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Boohoo. I am just distraught over the thousands (millions?) of high-risk borrowers who got mortgages over the past few years and are now unable to pay back their loans. And the poor lenders! They were so generous, offering loans with practically no interest at the beginning, so that people who couldn't otherwise afford a home could enjoy the American Dream. And now they're being vilified just because the interest rates rose to usurious levels in the third or fourth year of the loan. Hey–I'll bet that brief taste of homeownership will make those defaulting borrowers better citizens! Better to have owned and lost than never to have owned at all.

Of course, sooner or later you have to pay for what you buy–well, somebody has to pay, anyway. So with bills coming due and borrowers out of cash, big-hearted lenders like Countrywide Financial and Fremont General are suffering, with nonperforming loans creeping up toward 10 percent of their portfolios. There are hints that things could get worse, with defaults on loans to qualified borrowers rising, too. Investors are howling, as stock prices tank. Regulators are sniffing for blood. Lenderland is no longer the happy place of endless possibility that it once was.

It's easy to pile on and lash out at the financially undisciplined. But instead of following the same tired script as during the S&L crisis in the late '80s and the Internet meltdown of a few years back, how about we show a little compassion for once? In times of squandered prosperity, it falls to ordinary bedrock consumers–the kind who spend only what they earn and balance their checkbooks–to reach out and offer amnesty to the fallen mighty. The responsible middle class, after all, is still the backbone of America, even if we can't afford health insurance. And it's up to us to begin a national mortgage-meltdown reconciliation, so we can begin the healing and move forward to a new era of too-good-to-be-true consumerism.

So please–before you pass judgment, think a little deeper about the participants in this so-called scandal:

The lenders. Sure, they overlooked a poor credit history here, a prior loan default there. But think what they did for our country. Reckless lending fueled a historic housing boom, at precisely the moment we needed it! The highflying housing market helped take the edge off as the war on terrorism began to flag and the civil war in Iraq started to get really depressing, sustaining American morale like a Prozac in every pot. That was all fueled by easy money. We have lax lenders to thank for a nationwide bonhomie. You felt it–and you know it. Don't forget where it came from.

The borrowers. Yes, yes, caveat emptor is the most universal bit of knowledge in the history of the world. But every generation still has to learn it somehow. And, boy, is it hard being an educated consumer these days! There's more fine print than ever. TV and the Internet give us endless opportunities to change the channel or click on a new link the moment we get bored, rewarding short attention spans. Sure, we could blame individuals for signing contracts with onerous terms they should have known about. But come on–doesn't the System share a big part of the blame?

The flippers. Even I have found it grating listening to the nouveaux riches brag about how they made $100,000 or $200,000 turning over a home sale in six months. But those money-grubbers have fueled a little-noticed boom in an important industry: unnecessary luxury goods. Who really needs a 50-inch plasma TV? Or a sedan with a massager built into the seat? Or a talking refrigerator? Not you or I. But without all that liquidity in the consumer-goods market, we'd have far less innovation in the labs at LG and Audi. It gets better: Many of those unnecessary luxury goods are made overseas. We export dollars in order to buy them, which adds to the currency reserves of foreign countries. They then take those reserves and invest them in U.S. securities–which helps keep interest rates low! Is that a virtuous cycle or what?

--Rick Newman

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subprime mortgages
  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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