Housing Boom Over, Time to Whoop on Bankers

From today's Opinion Journal:

Mortgage delinquencies are rising, subprime lenders are going belly-up--another company filed for bankruptcy Monday--and the Senate Banking Committee is holding hearings today on "predatory lending." All of this can only mean one thing: Congress is looking for someone to blame now that the housing boom is over.

Related to this is the contention, made by the same populists on the current "predatory lending" rampage, that banks make money by charging them "excessive" interest. But, if anything, the recent spate of bankruptcy among subprime lenders suggests that they were charging too little interest to compensate for the credit risk they were taking by lending to people with bad credit histories.

Lenders know that some percentage of marginal loans will go bad. But they can't know in advance which loans will sour--or presumably they wouldn't make those bets in the first place. The only way to ensure close to 100% loan performance is to restrict lenders to making only the safest loans. This in turn means shutting out of the market a whole lot of people who may be "risky," but still manage to send in their checks every month.

For such borrowers, a lender who makes a risky loan is not a predator, but a gatekeeper to homeownership and the economic opportunity that goes with it. We suspect that the vast majority of those who stretch to afford a home and sacrifice to make their payments don't need the kind of protection Mr. Dodd is offering.