Stay away from risky mortgages
Interest rates will be allowed to continue rising, but gradually, later this year, Federal Reserve Chairwoman Janet Yellen told members of Congress on Wednesday. The economy is improving, meaning the Fed’s longstanding policy of holding interest rates at basement levels is no longer necessary, Yellen explained.
Yellen’s comments on interest rates and the economy in general made headlines, as many in politics, the media and financial services wonder how economic growth can be stimulated without causing inflation. No one wants to back away from low interest rates at the risk of falling back into the so-called “Great Recession.”
But a key concern, subprime mortgages, has received little notice. They may have been the straw that broke the camel’s back leading to the recession.
For years leading up to 2008, banks were encouraged — sometimes virtually ordered — by the federal government to hand out mortgages to virtually all comers. Inadequate focus on borrowers’ ability to make the monthly payments resulted in a mountain of defaults.
There is reason to believe that with the economy improving, the same attitude about mortgages may be returning. That simply must not be permitted. Rather than encourage banks to accept subprime mortgages, Washington should do all it can to discourage the practice.