Blade: Strickland Won’t ‘Jawbone’ Contract Rewrites, and Therefore Is Not Doing Enough

That’s what this editorial is saying:

While some of the blame certainly rests with borrowers who wanted more expensive homes than they could really afford, the lion’s share belongs with lenders who handed out big adjustable-rate mortgages to people who had only marginal prospects of making the payments.

These so-called subprime loans carry initially low rates to entice borrowers. When adjustable rates inevitably increase over time, monthly payments go, quite literally, through the roof. Increasingly often, the result is foreclosure.

In concrete terms, there is not a whole lot that state and local governments can do to ease the foreclosure problem but jawbone recalcitrant lenders into restructuring loans — “taking a haircut” in industry parlance.

Unfortunately, the bland recommendations from the task force indicate that Governor Strickland is unwilling to ratchet up pressure significantly on the politically powerful financial services industry.

The Blade’s blame allocation is out of line. Borrowers deserve more than “some” of the blame. Try at least a third, with lenders and the outfits like Fannie Mae and Freddie Mac who lowered credit-score thresholds for mortgage loan approvals several years ago splitting the rest.

The Blade also falls into a common trap of misunderstanding — not every loan with a low teaser rate is a subprime. For that matter, not every subprime has a teaser rate.

There are surely a few subprime loans out there with punitive provisions that could be neutered as a matter of public policy, but despite they hype, they’re the exception, not the rule.

Rewriting loans en masse would set an ugly precedent. Lenders would have to price additional risk into future loans to protect themselves, making mortgage loans more expensive and applications less likely to be approved.

It’s a very painful situation, but heavy-handed, he-who-shouts-the-loudest government intervention of the nature the Blade would like to see would only make things worse in the long run.

Cross-posted at Wide Open.