Subprime Lending Needs No Further Regulation

Published June 27, 2007

Your article “Deed Trouble” (June) gives a balanced description of the subprime lending situation in Minnesota and other states. However, the article’s call for more regulation is misguided.

Punishing subprime lenders would hurt people who cannot otherwise obtain loans. The subprime lending market helps thousands of families become homeowners and rebuild their credit.

Banking and borrowing are already more heavily regulated than most industries, and they are so complex that few understand them completely. Further regulation would particularly hurt women and minorities, who have benefitted the most from the subprime mortgage industry.

The recent troubles are simply a market correction for irresponsible behavior. Subprime loans have grown enormously in tandem with the real estate bubble. Too many companies were extending subprime loans to borrowers at extreme risk levels. With the bursting of the real estate bubble, home loans suddenly became dangerous to borrowers who gambled that the value of their home would outgrow their subprime mortgage payments. In effect, the borrowers gambled on the value of their home, and the lender gambled on the ability of the borrowers to repay the high-interest loans.

When you gamble, you sometimes lose. In this case, the market is punishing risky behavior.

The proper response to this market correction is not more regulation. Private companies will find it in their self-interest to help subprime borrowers. And lending companies have certainly learned their lesson about extending credit to those likely to foreclose.

Dane G. Wendell ([email protected]) is a legislative specialist for The Heartland Institute. He is author of Heartland’s forthcoming “State Welfare Report Card,” which describes welfare reform successes and failures in the 50 states.