House Approves Bill to Restrict Mortgages

House Approves Bill to Restrict Mortgages

"With home foreclosures skyrocketing, the House on Thursday voted to crack down on mortgage lenders by forcing them to get licenses, making them responsible for discovering whether borrowers can really repay and fining them for steering people toward risky subprime loans," CNN reports. "The measures are designed to keep more people from sinking into the current mortgage crisis, where prospective homeowners with shaky credit got mortgages with low interest rates only to see the rates rise and bring monthly mortgages up to prices they could not afford."

In "Our Subprime Fed," Cato senior fellow Gerald P. O'Driscoll, Jr. writes: "In recent years, monetary policy has created an expectation that the Federal Reserve will bail out investors when asset bubbles deflate. The recent crisis in the subprime mortgage market is at least partly the outcome of this new approach to monetary policy. That crisis has already had widespread ramifications for homeowners and investors.

"Today, monetary policy is fostering moral hazard. Monetary policy can generate moral hazard if it is conducted so as to bail investors out of risky and otherwise ill-advised financial commitments. If investors come to expect that the policy will persist, then they will deliberately take on additional risk without demanding commensurately higher returns. In effect, they will lend at the risk-free interest rate on risky projects, or at least at a lower rate than would otherwise be the case. Too much risky lending and investment will take place, and capital will be misallocated."