United States presidential hopefuls' solution to the subprime crisis

The reports sound intimidating about the humongous effect of the subprime crisis. Major investment banks had to write down billions of dollars in losses, mortgage lenders declared bankruptcy, and the Federal Reserve had to inject liquidity into the financial markets. The US property markets declined after years of record highs.

The culprit is the triple A-rated subprime mortgage. It is a structured investment vehicle - a type of loan granted to individuals with poor credit histories. Since subprime borrowers present a higher risk for lenders, subprime mortgages charge interest rates above the prime lending rate.

The subprime market performed quite well during its inception (thanks to its "AAA" rating) until it reached a point that the bubble it created became so big that it's about time to burst it. Soon enough, the US subprime market collapsed and its effects reverberated across the globe.

Now that the US presidential election is nearing, perhaps it would be good to know what the current crop of presidential candidates are thinking and what would be their probable solution to address the crisis.

To start with, strong contender Barack Obama wants to create a "universal mortgage credit," which would give homeowners who earn less than US$50,000 a year and don't itemize their tax return a 10% credit as non-itemized tax returns aren't eligible for the mortgage interest deduction. He further proposes to set aside a government fund to help in-debt home owners avoid foreclosures, as well as a standardized borrower score, which would allow home buyers to compare their ability to afford differing mortgage products.

On the other hand, Hillary Clinton wants to place a 90-day moratorium on foreclosures and a five-year freeze on interest rates. Likewise, she wants to set up a US$5-billion government-sponsored fund to help borrowers with negative equity.

For John Edwards, he wants also to freeze interest rates to allow markets to recover and to let homeowners avoid immediate foreclosure proceedings. He favors halting foreclosure activities until lenders provide assistance to borrowers, such as reducing interest rates or converting a loan to a fixed-rate mortgage.

But freezing interest rates is not a solution for Mike Huckabee, saying he is worried about the long-term effects on lending.

Meanwhile, the former New York City Mayor Rudolph Giuliani has a different view. He rather backs the action of the Federal Reserve and warns that the Sarbanes-Oxley fallout could affect any subprime-related regulation. He says this regulation amounts to a tax as it increases the cost of business.

With regard to John McCain, he hasn't put forth a concrete position, but stressing a relief is needed, though he warns against the unintended consequences of federal action.

Likewise, Mitt Romney hasn't articulated his own position on how to deal with subprime lending, but has agreed with the so-called "Bush-Paulson" plan that places a short-term freeze on interest rates and gives local governments the authority to rewrite problematic loans.

*Source: http://www.forbes.com