Despite the media hype surrounding the current mortgage "crisis" in the United States, the perils of the subprime lending industry are not as universally devastating as you may have been led to believe. While the reported losses and foreclosure rate increases are alarming in and of themselves, they are relative figures that, when presented as stand alone information, may cause one to form unbalanced conclusions. These emotionally charged conclusions drive people to look for someone to blame. There are lots of fingers being pointed in various directions, but the truth is that there is equal fault to be shared by all parties involved. Much of the media frenzy surrounding the climate of the American housing market is more about politics than truth, and most current and potential homeowners shouldn't fret about all the negative stories in the news.

Because of the natural risks involved with subprime lending, it should have never become so easily accessible; the demand is now so high that these loans are even flagship products for specialized lending organizations. The aggressive push for market share by lenders who were no longer satisfied with profits from traditional, conforming loans created an entire industry that rewarded the financially unstable. The Mortgage Bankers Association reports that in the third quarter of 2007, subprime adjustable rate mortgages (ARMs) represented only 6.8% of the mortgages outstanding in the US, but they made up 43.0% of the foreclosures started. Subprime fixed mortgages represent 6.3% of outstanding home loans and made up12.0% of the foreclosures started in Q3. It is apparent that this sector of borrowers should have never been courted by financial institutions. While it is true that the subprime mortgage industry is on a downward spiral, these current conditions were reasonably foreseeable, which is why the entire U.S. economy will not be helplessly victimized by its demise.

There is a trickle down effect involved with the bust of this market, but the consequences are not of the pandemic nature that many forecasts and predictions imply. If you don't know the facts, the sensationalism alone can cause you to lose sleep. Let's separate some of the facts from the fiction that is being reported:

Fiction: Foreclosure is a nationwide crisis with myriads of people losing their homes.

Fact: Based upon the U.S. Census reporting of the number of U.S. homeowners and foreclosure rates published by RealtyTrac, the largest, most comprehensive national database of foreclosure data, as of November 2007, only a rough 2.34% of U.S. homes are actually in foreclosure.

Fiction: If it weren't for the predatory lending practices of the subprime mortgage industry and the federal government's lack of regulation, we wouldn't be experiencing this real estate slump.

Fact: An econometric study performed by the Federal Reserve Board of Chicago shows that speculative bubbles, interest rates, and loose monetary policy had little to do with the housing boom and market overvaluation that began to emerge in 2005. In fact, Mark Thoma, professor of Economics at the University of Oregon, summarized the study, reporting that, "without any other developments, the homeownership rate is likely to have gone up anyway", and its subsequent market overvaluation is "largely explained by technology-driven wealth creation over the previous decade." The increase in household wealth caused an increase in demand, which drove housing prices up.

Fiction: Housing prices are going to plummet because of the mortgage crisis and the housing bubble that has been growing since 2005 - and it's about to burst!

Fact: There have been previous U.S. housing bubbles and home price corrections, and they are not only predictable, they are survivable. Global Insight, America's foremost provider of worldwide economic, financial, and industry analyses, reveals that between 1985 and 1987, there have been a number of metropolitan housing bubbles, with a typical documented price correction period of four years. These conditions were caused by economies that experienced very rapid growth, which resulted in subsequent housing overvaluation. Furthermore, a new study by Global Insight and National City reveals that 63% of U.S. housing markets are overvalued, particularly in areas with very low foreclosure rates. The prices were scheduled for decline anyway.

Fiction: The best way to lighten the burden on the economy is for the government to provide emergency bailout options for the lenders and homeowners.

Fact: This won't really help those experiencing the foreclosure crunch but will penalize taxpayers who have been responsible in keeping themselves out of such financial ruin. Bush's plan, proposed by U.S. Treasury Secretary Henry Paulson, has more potential to hurt innocent Americans than it does to help those who are in foreclosure. Freezing teaser interest rates won't do much to help many of these cases because the truth is that the borrowers could never afford the houses in the first place - that's why they had to get subprime financing. Their high debt-to-credit ratios and poor credit histories suggest that they face enough debt that the freezing of home mortgage rates will not do anything to improve their situation; it may only simply delay the inevitable. Furthermore, government subsidies equal tax dollars taken away from other programs and operations that serve those who have been fiscally prudent to bail out the few who have been embarrassingly irresponsible. Moreover, future home buyers in areas with high foreclosure rates face an unfairly reduced housing market when defaulters are allowed to stay in homes that they cannot afford. Allowing such financial irresponsibility to continue encourages future fraud and delinquency, and the misappropriation of government funds to sponsor bailout plans will hurt the national economy as well as state economies.

It is unfortunate that the current foreclosure surge is affecting so many American households, but the blame and accountability needs to be placed where it belongs so that the media and political sensationalism of the issues can be subsided. The government, the industry, and the borrowers themselves have caused this "crisis", and the brunt of the responsibility needs to fall upon those who were directly responsible, which are the lenders and the borrowers. The Federal Reserve Board revealed in a press release on December 18 a proposal to add "Regulation Z" to the Home Ownership and Equity Protection Act (HOEPA), a rule designed "to protect consumers from unfair or deceptive home mortgage lending and advertising practices", but such regulation should not even have to exist. Adults have the capacity and the responsibility to make prudent financial decisions. The private sector should not be able to act haphazardly and then punish the public by using tax payer dollars to avoid the consequences of their actions. That is nothing more than corporate welfare, and it is not fair to those who pay for an organization's mistakes while it does not share in its profits. However, if you review the transcripts of recent Presidential debates such as those of the Democratic debate in Iowa, published by the political blog of the New York Times, you will find that some politicians are using the mortgage situation to connect emotionally with voters, comparing it to Hurricane Katrina and villainizing the government in attempts to convince voters that they will remedy the apathy of the government on behalf of the voters. Their tactics are working, too; much of the attention garnered by the mortgage industry crunch is focused on Capitol Hill in light of the 2008 Presidential Election.

The truth is, however, this is a market issue that should be resolved where it started; with the housing and consumer lending markets. It is arguable that subprime borrowers are the victims of predatory marketing and lending practices, but the old adage proves true: "if it sounds too good to be true, it probably is." It makes no sense for someone with unstable finances to think that they can or even should be able to afford property that they cannot even make a respectable down payment on. If your credit is bad, it doesn't make sense for someone to give you tens of thousands of dollars unless there is a sneaky catch or a stiff penalty involved. It is the consumer's responsibility to make wise decisions concerning consumer credit and debt and if the lending institutions are ambitious enough to take such risks on subprime borrowers then they should be strong enough to take the hits when those investments prove to be unwise and unprofitable. Bombarding the media and crying wolf, or "crisis" if you will, is an underhanded attempt by financial institutions and related government agencies at shirking responsibility by making the crises of the mortgage lending industry everybody's problem.

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