Over the past few months, the press has deluged Americans with weepy stories about people who are in danger of losing their houses because their sub-prime mortgages now exceed the value of their houses, which the recession and the popping of housing bubbles have caused to drop.
I am sympathetic; and I, and other taxpayers, am being asked to provide relief in one form or another. People who bought houses whose basic value far exceeded what they might reasonably have expected are now expecting other taxpayers to bail them out; and the expectations will probably be satisfied.
But what if one poses the issue in reverse: Would taxpayers be willing to put tax dollars into a program that would buy single-family houses that are larger and more valuable than would be consistent with usual standards of prudence in mortgage lending? I strongly doubt it.
Implicitly, proponents of homeowners’ bail-outs are relying on what one might call a “second-hand endowment effect.” We are supposed to offer money in sympathy with others’ losses (not of life, merely of property), whereas we wouldn’t offer money out of sympathy to provide them gains. Similar second-hand endowment effects exist, I believe, toward a variety of existing and proposed government programs to “help” citizens.
(Hat tip: DJH)
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Really? This seems awfully close to the common shortsightedness of “everyone for yourself” economic thinking. If those people who made bad decisions (and those people who were manipulated into making bad decisions) all lose their houses and/or go even deeper into debt, are we all better off? Surely bad decisions shouldn’t be rewarded–but if enough people make bad decisions and go down, they’ll bring us all down with them.
I didn’t buy a house during the bubble, not because I couldn’t qualify for a mortgage, but because I thought that housing shouldn’t consume 50% of my income. I thought the prices were too high so I continued to rent despite the tax advantages to paying mortgage interest.
These programs designed to keep the reckless in their homes are just wrong. I believe they are just as wrong as the initial decision to allocate 50% of their income to mortgage payments in the hope that in one year people would be willing to spend 75% of their income to buy the same house.
I don’t think I should be punished by a government that I have been paying a boat load of taxes (see lack of tax deduction above) because they want keep housing artificially high.
There. I said it. Who do you want to feel sorry for: the reckless prodigal or the good prudent son?
Zack, Your “those people who were manipulated into making bad decisions” comment speaks volumes. Your “victim” mentality highlights the lack of personal responsibility and general narcissim – so pervasive and damaging in today’s society.
I think the most confounding part of finance for me right now, is that the people who most need to refinance are those who are underwater. They are also the people who can not do so. Bizarrely, I suspect that if people were allowed to refinance the existing debt at the new lower interest rates, regardless of the current value of the asset, it would drastically increase the likelihood of repayment. Not allowing these individuals to find more affordable financing seems likely to perpetuate the crisis.
Despite my statements above, I fundamentally understand why these assets fail to meet good lending criteria. However, I can’t help but be somewhat astounded that it isn’t considered a greater good to allow an underwater refinance and increase the chance of repayment, especially if borrowers are steered away from dangerous loans.
My sympathies mainly extend towards people who bought somewhat responsibly, but have been hurt by the market downturn. In some markets it is impossible to avoid the price downturns.
I don’t support a bailout in the form of cram downs as that seems like a reward. Though I find it interesting that you can do that with investment property.
While the mortgage brokers probably engaged in a lot of misrepresentation, the way to handle crime is to arrest the criminal. It is unfortunate that the crime victim often loses the monetary value of their property.
If your accountant embezzles from you, you may be out your money. If the embezzler did not pay your taxes out of the money embezzled, and why would they, you would still owe taxes on the money you never received. Yes, you should have read the fine print on anything you signed, but the government doesn’t try to protect people from those losses.
As a renter, where is my bailout? If the government is subsidizing home prices, they are keeping home prices out of the reach many people.
When the current appeal of Treasuries wears off, what will happen as those prices drop? High Treasury prices mean low interest rates. When Treasury prices start to drop, as in the the Treasury bubble starts deflating, won’t there be a flight to quality? When nobody has faith in the US government’s ability to repay, or they have no desire to be repaid in US dollars, how will that benefit anybody in the US?
I have always wanted to be able to be a millionaire, or a billionaire. When it is only because of excessive inflation, there is no real improvement in worth.
Many individuals made decisions, that were, at the time, good for the individual, however, in the long run have proven bad for society in general.
Society must on some level help these individuals out because it will be help society to do so.
What program will do this without inducing individuals to make similar decisions in the future?
Fund bulldozers. Then we can use them on the underutilized new developments to reduce excess supply.
Wow, I hope I’m never in a bad spot with this crowd around. Yes, many homeowners made dumb mistakes and will have to face the consequences of those mistakes but to say no bailouts ever for anyone and then to deride those in foreclosure is rather cruel and as one poster put it, shortsighted. I would much rather help keep my neighbor in their home than to help a CEO go live it up in the Bahamas for a week.