Does the Government Have the Responsibility to Act in the Mortgage Crisis?

I recommend that the government act in the mortgage crisis, for it is the government's duty to protect the general well-being of the people and the society as a whole.

In the United States finance sector, mortgage lending has become a competitive business. It started off in the deregulation of banks that urged the creation of regulatory agencies such as Federal Deposit Insurance Corporation, and Federal Housing Administration, among others, to primarily protect consumers and expand homeownership. It was followed by the Community Reinvestment Act and Home Mortgage Disclosure Act which both significantly reduced racial disparities in lending. In addition, Depository Institutions Deregulatory and Monetary Control Act were adopted in 1980 to eliminate interest-rate caps, thus, sub-prime lending became more feasible for lenders. The series of laws made the banks, insurance companies, and credit card firms became parts of the financial services market while the government neglected its responsibility of protecting consumers with rules, regulations, and enforcement (Atlas and Dreier,2007).

The US government supported mortgage lending to encourage house ownership among their people. For the past years, the business has grown rapidly due to wider information dissemination brought about by technological advances. However, there were also banks, mortgage lenders, and scam artists who made ways to earn huge profits from consumers who wish to fulfil their American Dream of home ownership. Several loan products were invented that put the borrowers at risk. There was an evident growth in advertising the easy access to credit with slack requirements. Lenders offered low initial interest rates and "low" fees and charges but after a certain time, the rate will increase, thus, homeowners did not cope up with the automatic rate increase and found trouble paying for their newly bought house. The result is the increase in number of house repossessions, delinquencies, and payment defaults (Munro, Lending to higher risk borrowers: Sub-prime credit and sustainable home ownership, 2005)

It is apparent that the US government overlooked its responsibility of protecting consumers with rules, regulations, and enforcement. And now, the crisis is likely to worsen. Of the 7 million borrowers of sub-prime loans who bought houses since 1998, 1 million already defaulted and financial analysts predict that over 2 million will default over the next few years (Atlas and Dreier, 2007). It is therefore the government's call to act on the mortgage crisis and prevent this from happening again.

A series of bills were passed as an effort to ease the fiscal woes. The US government approved the five-year freeze on certain mortgage rates scheduled for a rise at an unreasonable level. President Bush clarified that the target of this effort are the victims of predatory loans and not those lenders, real estate speculators and homeowners who bought houses they really cannot afford (Clark 2007). However, this agreement lacks the force of law as it does not force banks or investors to share the pain or be part of the solution.

Similarly, the bill on Federal Housing Administration to support refinanced loans for those borrowers who are delinquently paying due to sharp increase in mortgage rates was approved. This bill also made FHA loans more attractive than the sub-prime mortgage lending by lowering down payments and expanding eligibility for home owners. (Seacoast Media Group, 2007).

Aside from these bills passed, the US government needs to help victims of predatory loans and adopt measures to stop the crisis and prevent it from occurring again. A loan restructuring for predatory lenders is needed as well as funding for non-profit groups to help borrowers negotiate for their loans. The Congress must take bolder actions to restrict abusive lending practices. It can outlaw adjustable-rate mortgages which ask the borrowers to treat home mortgages like stocks. In addition, Congress must ban private lenders and brokers from issuing all sorts of sub-prime loans and focus on strengthening non-profit lending institutions to serve credit needs of high-risk borrowers with transparent and stable loans (Atlas and Dreier, 2007).

Based on the extent of the crisis and government's failure to be the lending industry's watchdog, I therefore recommend that for the government to act in the mortgage crisis for it is the government's duty to protect the general well-being of the people and the society as a whole.

references

Atlas and Dreier, http://www.prospect.org/cs/articles?article=the_conservative_origins_of_the_subprime_ mortgage_crisis, 12/18/07

Seacoast Media Group, http://www.seacoastonline.com/apps/pbcs.dll/article?AID=/20071215/ BIZ/712150310/-1/rss50, 12/15/07

http://www.guardian.co.uk/usa /story/0,,2223477,00.html, 12/6/2007