President Bush on Friday (8/31/07) announced steps that his administration will be taking to help borrowers avoid defaulting on their sub-prime mortgages and to maintain the mortgage industry.  But very few people really know what is meant by a 'sub-prime mortgage'.

The term sub-prime seems to imply that these are mortgages somehow tied to the so-called prime interest rate; perhaps they are mortgages carrying an interest rate below the prime rate.  Since the Federal Reserve Bank sets the prime rate, there is the strong suggestion that the federal government is thus responsible for these mortgages and particularly for those in default.

When we first came to Texas nearly 20 years ago, my spouse and I obtained what might be called a sub-prime mortgage; because of our credit history, a 20% down payment, and a 15-year (instead of a 30-year) mortgage, the interest rate on our mortgage was significantly less than most (though not less than the prime rate).  We were also able to negotiate a mortgage with:

• All amounts paid in excess of the minimum due at the time being credited as a partial repayment of principal.
• Interest calculated only on the outstanding principal balance.
• No penalty for an early payoff.

While we could have qualified for a mortgage nearly twice as large, we borrowed only enough money to purchase as much house as we needed at the time.

Today, our home is completely debt-free; we haven't made a mortgage payment in more than five years.  When the interest rate paid on savings dipped below our mortgage interest rate, we made extra payments on the mortgage.  Eventually, we secured a home equity loan at a lower rate than our mortgage, retired the mortgage early, and then paid off the home equity loan before it was due.

But the current meaning of 'sub-prime' is quite different from our experience.  Sub-prime is currently used to describe mortgages given to borrowers who, for one reason or another, did not qualify.  These mortgages were typically made at higher than normal, usually adjustable, interest rates and frequently with no down payment.  Worse, monthly payments for an initial period were sometimes interest-only payments with the monthly amount increasing later to finally include payment on the principal.  These borrowers are now finding that they are unable to make the increased mortgage payments, they owe more on the mortgage than the house is worth, and they have little or no equity in that house.

Now comes President Bush to the rescue.  Living beyond their means is to be forgiven.  Poor judgment and unrealistic assumptions about the housing market and their own earnings are to be rewarded.  But the federal government is going to find and punish those who coerced the gullible into taking larger mortgages than they could afford with "teaser" interest rates that are now increasing.  To prevent all of this from happening again, Big Brother in Washington is going to require even more disclosure paper work that nobody except the bureaucrat authors has ever read or ever will read.

In spite of the media hype, there isn't a great deal of money involved here; less than 1% of all mortgages are in or near foreclosure so I'm not concerned that this bailout is a budget buster.  I am disgusted by it on principle; taking my tax dollars to rescue someone else from the results of their bad decisions amounts to socialism, pure and simple.  On another level, it is a betrayal and an insult.  President Bush, whom I have supported on most issues, is telling me that I've been a fool to live prudently and not depend on government handouts.

Some would claim that my objection to this bailout contradicts my supposed claim to being a humanist in that rescuing these borrowers and keeping them in houses they can’t afford is a good for humanity.  My humanism, on the contrary, is concerned with the long term good for all humans and this bailout definitely doesn’t meet that criteria.  While it may be good for the few, it is detrimental to the many; however small that detriment might be.  For the long term, the bailout isn’t even good for the recipients of this government largesse; they learn that they will not be held accountable for their decisions and go on to make ever worse decisions for themselves and the rest of humanity.

And, I confess, there is an element of selfishness in my view on this issue.  The strength of my concern for the good of humanity is directly proportional to the closeness of that humanity to me and mine.  I don’t believe that my well-being is more important than yours but I most certainly am not willing to surrender my property to you because of your continuing bad decisions.

As always, the views expressed here are those of one humanist….