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Sub-prime time

Trouble in the mortgage market could rattle the economy. But there's no reason for a federal bailout.

March 14, 2007

ON TUESDAY, the Mortgage Bankers Assn. announced rising quarterly home foreclosure rates. The Dow Jones industrial average plunged almost 250 points. The chairman of the Senate Banking Committee speculated that millions could lose their homes.

It's scary stuff. But not so scary that anyone needs to raise the possibility of a federal bailout. This means you, Sen. Christopher J. Dodd (D-Conn.).

Dodd, chairman of the Senate Banking, Housing and Urban Affairs Committee, has been keeping an eye on sub-prime loans, which charge higher interest and go to more risky borrowers, for months. He and Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, have promised legislation to rein in predatory lending practices.

On Tuesday, Dodd took things a step further, suggesting that the federal government could offer financial assistance to at-risk homeowners. He offered no specifics, telling reporters only that the government needs to provide at-risk homeowners "forbearance or something like that" to help them "work through" their debts. "For these consumers," Dodd said in a speech to the National League of Cities, "the American dream will become the American nightmare."

Standing up for homeowners doesn't take much political courage. Warning that 2.2 million Americans could lose their homes -- a number that the Mortgage Bankers Assn. says is exaggerated -- is sure to generate attention. And mentioning the American dream makes a nice sound bite for a senator running a dark-horse campaign for president.

But providing forbearance is a job for lenders, not taxpayers. Lenders got very creative when they learned they could profit by unleashing a flood of easy credit. If they want to remain solvent and keep Wall Street happy, they'll have to be equally creative when it comes to refinancing sub-prime mortgages.

The federal government is already playing a role. On March 2, five regulatory agencies called on lenders to assess borrowers' ability to pay and to explain loan terms clearly, making sure customers understand all costs, terms, features and risks. Such changes could help prevent future borrowers from falling into the easy-money trap.

In the meantime, lenders have every incentive to cut struggling borrowers some slack. Ambitious presidential candidates shouldn't be suggesting that the government might want to too.

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