Sunday, February 24, 2008

Mortgage Bailout?!?

Head's up, everybody. Today I'm writing irritated!

I keep reading in the news about a "mortgage bailout." There's all this talk about the "poor homeowners" who have gotten in over their heads... they bought at the peak of the housing boom and now their homes are worth less than the amount of mortgage held. Over a period of weeks, it has been implied that the President is a cold and heartless man because he refuses to bail out the irresponsible. It is now beginning to appear that the President may cave to political pressure and fashion a bail-out anyway.

Bank of America has proposed creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates. Does this irritate anybody besides me? A number of people went out at the height of a housing boom and purchased more home than they could actually afford. Some did it with interest only mortgages, which they KNEW meant they would eventually be required to refinance, which would bring their mortgage payments to a higher level. Some afforded their payments only by financing on an adjustable rate mortgage, knowing that as the rates go up their payments go up. And I can acknowledge that there are a few who have probably been suckered into their positions through some slippery actions on the part of a few greedy people in the industry.

Meanwhile, there are millions of responsible people in the United States of America. People who have worked hard to get where they are, purchased the homes they knew they could afford (no matter if the mortgage broker told them they could qualify for more), and have used the market to their advantage to get themselves in a better housing position responsibly. I lived in the Phoenix area during the largest part of the housing boom, and everybody I knew talked about it being crazy. Nobody thought it was going to last forever. And yet people purchased. History repeats itself and this sort of market correction has happened in over-inflated areas of the country before. 

What really frosts me is the idea that the responsible people are now supposed to front the money for a "Federal Corporation" (which is just putting a business-like name on a new federal bureaucracy) intended to bail out the banks who gave bad loans (buying up mortgages at deep discount) and forgive the debt above the current market value of people's homes. Given that market history does repeat itself, it is safe to assume that home values will again begin to rise. Why should the responsible people in the U.S. be required to bail out the irresponsible? Talk about the ant and the grasshopper!!

And then to top it all off and make me really angry, the bank came out and said, "We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market." Uh-huh. It doesn't matter if it actually IS a bailout of the bond market as long as it's not perceived that way. Well, this particular citizen doesn't find any bailout acceptable. 

The New York Times recently wrote a sobbing article about the homeowners in this plight saying that they were "stuck in their homes." Well, good gravy! They just bought them... if they're stuck there for a little while because they cannot sell and pay off their mortgage they will just have to wait for the market to go back up. This isn't rocket science. I understand that this can create challenges for some people... changes in their lifestyle may become important. Some people may need to move for a specific reason and find themselves unable to do so without destroying their credit. I get that it's a problem. But I don't believe that it's a problem that needs to be fixed FOR them. 

Apparently now policy makers are admitting that a government bailout presents a "moral hazard" in that it may encourage irresponsible behavior in the future (kind of a no-brainer, that one). It also creates the dilemma that the government would be stuck with billions of dollars in defaulted loans (meaning we the taxpayers are just paying for the problem) which would add to an already too large federal deficit and debt. Whew!! Right? They realize that it would be a desperately stupid thing to do!! I'm soooo relieved. But wait - the very next paragraph:

But a growing number of policy makers and community advocacy activists argue that a government rescue may nonetheless be the most sensible way to avoid a broader disruption of the entire economy.

This is, I think, extremely short sighted. Who cares if there is broader disruption of the entire economy?? Well, I do - but I'd rather see that than a government bailout of anybody. If Americans don't learn their economic lessons now, they never will -- and the economy will be in even more trouble down the road. It's kind of like having a child who is in deep trouble. Do you let them face the consequences of their own behavior even though it's painful for them to do so? Or do you rescue them and shield them from any consequences? If you rescue them, are they likely to recommit the same crime? I would argue yes... and the same holds true for all of us. 

There should be NO government bailout for any of the mortgagors in over their heads. And there should be NO government bailout for any of the mortgagees which lent irresponsibly. That's my very opinionated opinion and I believe I'll be sticking to it.


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As usual, your comments are exactly right on! I love reading your "Musings". :)