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Monday, December 3, 2007
Subprime mess: Facing consequences, moving on
The Atlanta Journal-Constitution
With the full year nearly gone, Congress returns to the serious business of 2008 presidential politics today. Eleven months into the year, Congress has passed one of 11 spending bills while politicking repeatedly with children’s health care, subprime loans and Iraqi withdrawal demands. It’s an unserious body, frivolous even, more determined to make points than policy.
The politicking over Democratic efforts to create and hugely expand a new health care entitlement into the middle class is likely to roll over into the new year, postponed to months where the debate better suits political timing. For now, the Dems who control Congress are satisfied to push the umpteenth unsuccessful effort to set a surrender timetable for Iraq.
On both the war and new entitlements, the Reid-Pelosi Democrats are overplaying their hands — an observation, not an appeal to do otherwise. On some important fronts, the failure of Congress to act is success for America.
A bill the House passed, with Republican support, to deal with subprime lending is an example. The bill, passed 291-127 by the House just before Thanksgiving, guarantees more difficulty for those with weak credit to qualify for mortgages in the future. Lenders would be required to make certain that potential borrowers have a “reasonable ability” to repay. Loan-originators, including lenders and brokers, would be prohibited from directing them to loans that have “predatory characteristics,” whatever that means, or for which they lack “a reasonable ability to repay.”
“It’s an awful bill, a terrible bill,” said U.S. Rep. Tom Price (R-Ga.) before heading back to Washington. “I don’t think the Senate is going to take it up.”
Hope that he’s right. Should it pass, the consequences are clear. Lenders will raise standards to levels that unnecessarily exclude deserving borrowers. Why risk taking on a loan where a borrower has any chance in the world of defaulting — and then claiming it’s the lender’s fault because its agent should have known that a borrower with severe ingrown toenails and migraine headaches could not continue to work.
The result will be that taxpayers will become lenders to those who are not credit-worthy. Government will absorb the risk the marketplace now bears.
The fact is that lenders have already been taught a lesson this generation won’t forget — or repeat. The marketplace has brutalized all who touched subprime mortgages. Citigroup’s paying 11 percent for $7.5 billion the Abu Dhabi Investment Authority is putting into this nation’s largest banking company, money it needed because of write-downs on its investments in subprime loans.
The irony here is that the nation’s smartest bankers are paying subprime interest because they couldn’t avoid the marketplace stampede — even though they thought they’d isolated their exposure by taking only the best slice of packaged loans. They’d also bought servicing rights to $45 billion in home loans when subprime lender ACC Capital Holdings closed in August. Now Citigroup’s writing down assets by up to $11 billion this quarter, followed by $6.5 billion.
The point is that the marketplace has dealt brutally and efficiently with an industry that invited fraud and speculation while failing to check borrower income. It should be noted, too, that the so-called teaser interest rates have not yet reset to higher levels — meaning that the foreclosures now are largely loans that were fraudulent or were to speculators looking to make a quick buck or to borrowers who never had the income to justify the mortgages they got.
Prospects are good, too, that within the next couple of weeks, lenders, borrowers and regulators will agree to relief, for some period at least, to credit-worthy borrowers with loans about to reset to higher interest rates.
That, combined with the lessons the marketplace has already taught, are sufficient.
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Should medical care be repaid?
The Atlanta Journal-Constitution
You decide.
Deborah Shank, a Wal-Mart employee in Cape Girardieu, Mo., was seriously injured when the car she was driving was broad-sided by a big-rig truck. She suffered major brain trauma and was hospitalized for months. Her medical bills, paid by Wal-Mart’s health plan, approached half a million dollars.
The trucking company had a $1 million policy. Its insurance carrier paid her husband, Jim, $200,000. After legal fees, he collected $119.000. It paid Mrs. Shank $700,000 — or $417,477 after legal expenses and attorney fees. That sum was directed to a court-created trust for her future care. The accident ruined her life. She’s now in a nursing home with the bulk of her care paid for by Medicare and Medicaid.
All of this information was gathered and reported Nov. 20 by Vanessa Fuhrmans of The Wall Street Journal.
After the settlement, Wal-Mart’s health plan sued the Shanks seeking reimbursement for the $470,000 it had paid for her care. By virtue of a U.S. Supreme Court decision last year, it’s clear that employers can recover money paid for medical expenses from settlements and awards when that’s one of the plan’s terms.
The question: Should Wal-Mart recover? As its CEO, what decision would you make in this and other instances — considering that the costs borne would result in higher premiums or less coverage for a worker making near minimum wage? What about Medicaid, the taxpayer-provided health care plan for the nation’s poor? Should it recover (which it’s not proposing to do here) when the person covered collects a large sum? And should the recovery come before or after the lawyers are paid?
My inclination is to support the Wal-Mart health care plan’s effort to seek at least partial recovery, though it should come from the entire $700,000 and not just her portion. The attorney’s claim should not be superior to the health care provider’s.
You decide.
