Blaming People Not Banks for the Mortgage Crisis

It is more than a bit bizarre that anyone could take exception to homeowners borrowing against the equity in their houses. While it is good if people are able to accumulate equity in their homes, often families and individuals need to borrow money. Some borrowing may be for relatively frivolous purposes, but more likely, it is necessary because of a job loss, unexpected medical bills, a child’s education or to start a business.

It is difficult to see why the government should try to put roadblocks against people drawing on the equity in their homes for these purposes, especially since it will almost certainly be the lowest cost source of financing.

Is it somehow better that they pay double-digit credit card interest rates or possibly triple-digit interest rates from payday lenders than take out some of the equity they have accumulated in their homes?

During the housing bubble, many people did get in trouble with refinanced mortgages, but the problem was the bubble, not the act of refinancing. Many subprime purchase mortgages were designed to be refinanced before the teaser rate went up, on the assumption that the housing bubble would continue to grow.

It wasn’t the act of refinancing that got people into trouble – the mortgages were unaffordable to subprime borrowers to begin with.

In addition, refinancing a mortgage alone cannot drive up house prices, although refinanced mortgages could conceivably drive up mortgage interest rates, which would put downward pressure on house prices.

Ultimately, it doesn’t make sense to allow banks to issue bad mortgages regardless of whether they are for purchases or refinancing. As for the housing bubble, this one should have been easy for the Federal Reserve Board and other regulators to see, if they had their eyes open at all.

The fact that they allowed it to grow to such enormous proportions was the policy failure of the century. Their incredible incompetence was the problem, not people taking equity out of their homes.

Dean Baker is an economist and the co-director of the Center for Economic and Policy Research.

This article originally appeared in Room for Debate.

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC.