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Sub-Prime Folly: No Substitute for Virtue

  • 2007 24 Sep
Sub-Prime Folly: No Substitute for Virtue

Financial markets around the world and our stock market are reeling over what's called the sub-prime crisis—basically the collapse of shaky mortgages resulting from the drop in the housing market. Thousands of Americans are losing their homes, and many more are in danger of doing so.

Politicians have jumped in with both feet. The president has proposed we help borrowers who "may have been misled." Barack Obama (D-Ill.) and others have called on the federal government to crack down on mortgage lenders.

More regulation may be necessary, but what's at the root of the current crisis is imprudence—on the part of borrowers and lenders—a sad reminder that in financial matters, like all the rest of life, there's no substitute for virtue.

The sub-prime market is for people who cannot qualify for conventional mortgages, many because of their credit histories, others because they want to borrow more than they can truly afford. So why would mortgage lenders make such risky loans?

Well, some years back, Wall Street came up with a clever way to increase profits. They could buy mortgages from banks, package them into what are called mortgage-based securities, and sell them to clients—good for Wall Street, but it quickly led to some unintended consequences. With the housing market booming, there was a huge demand for credit. Every bank, savings and loan, or Internet start-up started promising money to people who wanted to buy a home. I myself must have gotten 10 letters a week from banks or mortgage companies, offering to finance my property.

Lenders knew, or should have known, that many of these sub-prime loans were foreclosures waiting to happen. But they couldn't care less, because they could offload these mortgages to the new secondary mortgage market on Wall Street.

And a lot of people who previously could not afford a home were taken in by offers of low interest rates for the first two years. Many figured that if interest rates rose sharply and they could not pay the mortgage, they could simply sell their house, because by then the value of the house would have appreciated dramatically. But folks forgot that if something seems too good to be true, it probably is.

It was like a gigantic game of musical chairs. Everything worked fine so long as the music kept playing. But once house prices started falling, the bubble burst. The market for sub-prime securities collapsed. Overnight, credit tightened around the world, and stock markets went into a tailspin.

Despite all the obvious risks, lenders lent, unqualified borrowers borrowed, and Wall Street and mortgage brokers made money. Now in the last year, nearly 150 mortgage companies have gone belly up.

Once again we see worldviews really do matter. The worldview that says live for the moment, get whatever you can, always leads to disaster. The Christian worldview, on the other hand, teaches behaving responsibly, living within your means, and deferring gratification—all of which are requirements for sustaining personal prosperity and the free-market system.

Economist Michael Novak said it best: Free, democratic capitalism is like a three-legged stool, supported by economic freedom, political freedom, and moral restraint. Today's sub-prime mortgage crisis, which could threaten the American economy, shows what happens when you forget that third leg of the stool—moral restraint.

Copyright © 2007 Prison Fellowship

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