The Government Makes Mortgage Lenders an Offer They Can't Refuse
December 7, 2007

Irvine, Calif.--President Bush has just announced a plan that would freeze interest rates on many subprime loans that would otherwise reset to higher rates. Treasury secretary Hank Paulson says that such freezes are in everyone's interest because "foreclosure is expensive for all participants--lenders and investors--and this expense is an incentive to avoid foreclosure when a homeowner has the financial wherewithal to own a home." According to the Wall Street Journal, Paulson got lenders and investors to support his plan by "using moral suasion" and "prodding."

But "the government has no business getting involved here," said Dr. Yaron Brook, executive director of the Ayn Rand Institute. "If it is in the interest of Countrywide, Citigroup, and investors to temporarily freeze certain borrowers' rates because foreclosure would be more costly, then they are perfectly free to do so. But this new government scheme will undoubtedly induce lenders to freeze loans when it is not in their interest--because the government's so-called prodding is backed by the threat of coercion. Does anyone doubt that if the lenders did not 'agree' to this scheme, they would be faced with some new punishing legislation, or be deprived of some backroom bailout bribe the government is offering them?

"The only variable the government adds to today's mortgage market equation is force--the ability to compel lenders, investors, and borrowers to act against their own judgment. Whether and when to renegotiate loan terms should be up to those who signed the contracts--and no one else."

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Dr. Yaron Brook is available for interviews. To interview Dr. Brook or book him for your show, please e-mail media@aynrandcenter.org

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