Be careful choosing fixes for the mortgage meltdown

There will be few winners in the mortgage meltdown. Democrats may be an exception, but they can blow it by trying too hard to fix what pains so many homeowners facing foreclosure.

On the campaign trail, New York Sen. Hillary Clinton calls for a 90-day moratorium on foreclosures and a five-year freeze on the rates of adjustable mortgages (the Bush administration is endorsing a similar plan). Former North Carolina Sen. John Edwards backs loosening bankruptcy laws to help borrowers keep their houses.

These ideas may have merit, but central to dealing with the subprime mess is telling this truth: The number of pure victims is small. The mortgage free-for-all set off a plague of bad judgments by lenders, borrowers, investors and Wall Street alike.

Democrats definitely hold the high ground in promising to discard the radical ideology behind unregulated markets. For the greater part of this decade, the Bush administration and the Republican-controlled Congress have looked the other way at crazy, greedy and reckless behavior.

The game was to maintain the housing bubble. Inflated home prices gave wage-stagnant Americans a false sense of prosperity, setting off a binge of borrowing and spending.

Thus, our leaders let mortgage lenders have their way with the unsophisticated — no rules of decency in place. They ignored a rash of exotic new investment vehicles that even Wall Street wizards didn't fully understand.

The people losing their houses are the most sympathetic of victims, but they too share culpability. Some were too lazy to read their contracts. Some squandered their homes' equity to finance shopping sprees. Many were not poor and went into enormous debt to buy real estate they couldn't afford. Do Democrats want to be seen bailing out the McMansion crowd?

Freezing interest rates on adjustable mortgages is not going to help most homeowners in trouble. Well over half the delinquent subprime borrowers are still paying the low come-on rates. In other words, they can't even afford the mortgage at their current below-market rate.

And delaying the scheduled resets of rates on home loans would not be terribly fair to those who bought securities backed by such mortgages. They were promised a certain return (though mortgages in foreclosure are also bad for them). These folks were already duped by the rating agencies that bestowed their highest grades on what turned out to be risky investments.

The most effective action Democrats and like-minded Republicans can take right now is to prevent this from happening again. That means passing new regulations and then enforcing them, of all things.

The Center for Responsible Lending has some suggestions for helping borrowers. Among them: Ban lenders from giving kickbacks to mortgage brokers who steer people to more expensive loans than their credit scores warrant. Hold Wall Street accountable for funding abusive lending practices via the secondary mortgage market. Provide meaningful remedies for homeowners when lenders break the law.

Politicians should recognize that falling real-estate values are not entirely a bad thing. They make housing more affordable for buyers. Preserving an inflated market through a big public bailout would be unfair to taxpayers.

Experts say that the mortgage crisis is only just beginning. In the months leading up to the 2008 election, Americans will witness the predictable aftermath of gluttony on a romp — boarded-up houses, empty shopping malls, depressed investors, jammed bankruptcy courts.

This scenario is bad for the president and his party even when it's not their fault, and this time it is. But Democrats must be careful when choosing "fixes."

Fiscal rectitude means regulating markets and punishing evildoers, but also letting even ordinary people pay the price of their folly. A massive rescue plan will put responsible Americans in a sour mood.

Providence Journal columnist Froma Harrop's column appears regularly on editorial pages of The Times. Her e-mail address is fharrop@projo.com