It's too late for the government
The meltdown of the domestic housing market, which looks to have no end in sight, is raising a chorus of voices calling for bailouts of distressed homeowners at risk of falling into foreclosure. The administration is strenuously lobbying lenders to restructure at-risk mortgages to stem the tide of defaults, and recent increases in loan limits for government-insured mortgages will allow more homeowners, particularly those in higher-priced markets like California, to refinance. Fannie Mae is now issuing HomeSaver loans to help borrowers in distress weather temporary financial difficulties and remain current on their payments.
For all the confusing acronyms the subprime housing crisis has introduced to the wider vernacular, the root of the whole mess is really quite simple: Lenders made loans they should not have made to borrowers who weren't qualified to buy the overpriced houses they couldn't afford. Demand for homes was artificially inflated, driving prices higher and with them more unaffordable loans in a manic self-reinforcing feedback loop. The resulting house of cards was destined to fall.
The question now is whether the government—that is, taxpayers—should be stepping in to try to soften the unwinding of this speculative mess. To be sure, foreclosures do no one any good. Lenders are stuck with homes they don't want and can't get rid of; defaulting borrowers are left homeless and homeowners in good standing watch as their largest asset rapidly depreciates.
But the time for government intervention has long since passed. Regulators could have prevented much of the excess simply by requiring lenders to verify income and borrowers to actually consider how their loan's amortization would impact future payments. Any attempt now to save these imprudent parties from themselves involves subsidizing stupidity at taxpayers' expense. Too many people bought more house than they could afford, and no amount of government intervention can fix that.