NCPA - National Center for Policy Analysis


December 7, 2007

Whatever relief the government plan to restore confidence in America's credit markets provides -- by freezing the introductory interest rates of adjustable-rate mortgages (ARMs) -- it is almost certain to hurt many more borrowers in the future, says John Berlau, director of the Center for Entrepreneurship at the Competitive Enterprise Institute.


  • Instead of going after the real instances of fraud, Treasury Secretary Henry Paulson set a sweeping standard for a wide swath of borrowers and lenders to back out of consensual agreements.
  • If this precedent of the government arbitrarily pushing through changes to contract terms is allowed to stand, it will make many legitimate businesses think twice about investing in the U.S. credit markets and increase costs for loans.

Further, the Paulson plan is unnecessary, says Burlau:

  • It is true that lenders are better off if they modify loans to troubled borrowers than if borrowers enter foreclosure ; but it doesn't follow that government needs to coordinate these efforts to bring all the players together, as defenders of this bailout claim.
  • Banks and borrowers have the incentive to get in touch and negotiate agreeable terms, and Paulson really can't make the process move any faster.
  • All his plan will do is set forth a broad category of borrowers eligible for relief that, contrary to the plan's intention, may include speculators and flippers who filed false paperwork.

Unless there was fraud, both borrowers and lenders should be expected to live up to the terms of their contract, unless they mutually agree to changes, says Burlau.  Innovations such as ARMs enabled many smart borrowers to improve their prospects by using the extra cash flow for purposes such as starting a business or getting a new degree.  These responsible borrowers and their lenders should not be punished for the imprudence of others.

Source: John Berlau, "Opposing view: Plan hurts future borrowers," USA Today, December 7, 2007.


Browse more articles on Economic Issues