One of the most frightening things about our country is that many of our politicians either do not understand basic economics or they realize that they can get votes by making promises that are economic disasters waiting to happen.  It occurs on both sides of the political isle.

Tonight in the debate Hillary Clinton said she was going to solve the current housing crisis by 1) a ban on foreclosures for three months; and 2) freezing interest rates on home loans for the next five years.

First, why is the Federal government interfering with private mortgage agreements.  It sounds nice to stop foreclosures.  However, as soon as the government intervenes, the risk for banks goes up.  (If you make a bad loan, it will take nine months before you can sell the property and get some of your money back).  There is pretty good evidence that banks will stop lending.  The current problem is a credit crunch.  Banks that made subprime loans are having difficultly placing commercial paper - making it hard for the banks to lend more money. Giving banks a reason to further restrict credit will only exacerbate the problem.

Second, freezing interest rates for home loans will further the damage.  If a bank can only make home loans at a government set rate, the bank will simply make loans in other areas where it can get the market rate for loans.  That means less money for home mortgages.  With less money available for home loans, it becomes harder to sell your house because potential home owners have a hard time getting a loan.   This will ultimately lead to even more foreclosures and a further weakening of the housing market.

Finally, some politicians in each party seem intent on blaming the banks that made the subprime loans for taking advantage of poor people.  Of course, anyone who understands bankings understand that banks do not want foreclosures.  They lose money - especially when the home owner has no other assets.  The banks made stupid loans hoping to get high interest rates.  But what about the home owners who bought homes that they clearly could not afford, hoping to ride the rise in property values?  When the economy slows down and they cannot make their payments, it is the bank's fault for lending them money. 

While the subprime crisis is of concern, of greater concern is the government interfering with the market.   The proposed fixes will contract the credit supply, will make it harder to sell homes prior to foreclosure, and will negatively effect real estate for years to come.  Its simply basic economics.