President Bush outline a plan today that would help bail out hundreds of thousands of borrowers who have been unable to pay off their mortgages.
Foreclosure rates have soared over the past year as homeowners struggle to pay off loans that have become more expensive as they mature. Many are hybrid adjustable rate mortgages (ARMs), the so-called toxic ARMs, that carried very low initial interest rates (“teaser rates”) for the first two or three years of their term but then reset to much higher rates after that.
The proposals put forward by the president included increasing the help offered by the Federal Housing Authority to troubled borrowers. That may take the form of expanding the pool of borrowers who can apply to the FHA to refinance their loans.
The president wants to work with Congress to temporarily suspend the tax liability that can take effect when borrowers lose their homes through short-sales, and when lenders forgive mortgage debt. That will enable borrowers to more easily rework their loans.
“I believe we need to change that code,” said the president, “so people won’t be penalized when they refinance their homes.”
Bush also discussed putting together a coalition of community groups, government agencies and government-sponsored enterprises, such as Freddie Mac to help homeowners refinance onerous loans. That would include making credit available as well as counseling borrowers on credit issues.
The president also wants to press efforts to combat predatory lending where unscrupulous mortgage brokers and lenders take advantage of naive consumers by steering them into mortgages that are extremely profitable for the brokers and lenders but ultimately unaffordable for borrowers.
Another of the president’s goals is to increase transparency in lending practices so consumers would better understand the true risks and costs of loans they sign up for. That could reduce the number of borrowers facing the loss of their homes in the future.
One thing the president promised not to do was a direct bailout of homeowners facing foreclosures or of lenders with financial problems traced to portfolios of defaulting subprime loans.
Such bailouts, he said, “would only aggravate the problem.”
Bailing people out of loans they entered into is a terrible idea because it rewards riskly, unwise behavior. Yes, the homeowners who have defaulted on their loans are in for some rough times. But is that a problem that has anything to do with the rest of us?
Indirectly, yes, as a wave of failed investments tends to ripple through other areas of the economy, as the article says:
The fallout from the mortgage meltdown crisis has spread beyond the home-lending and housing industries. It has resulted in a liquidity squeeze that has reached into the corporate world and increased borrowing costs for any less than low-risk propositions.
Does that matter? Not in my view. As the perceived risk in making loans increases it’s natural that lenders expect additional compensation for taking on the extra risk. That’s a feature of the lending system – it’s supposed to happen.
Bush is correct that creating a precedent by assisting participants in the subprime lending market would make the problem worse in the future. But that principle applies to all involved.
There are always people who suffer economic setbacks, the dynamics of a free economy make that a given. But a massive set of failed loans such as this indicates that a large number of both borrowers and lenders were gambling on interest rates continuing to be low indefinitely. As we now see, that was a sucker’s bet. But don’t we owe it to the people who lost their bets to see that they keep their homes?
No. The problem is that any sort of assistance given to the borrowers represents a transfer of money from people who did meet all of their mortgage and tax obligations to those who did not. It is, in effect, a tax on economic competence in that regard, one that is particularly unjust because it penalizes people for living within their means and rewards those who failed to plan properly.
It would be even worse to bail out failing corporations whose business it is (or was) to make sound lending decisions. It’s one thing for Joe Sixpack to get talked into a bad ARM deal and lose his shirt. Joe should have known better – computing interest is something they teach in high school and before these days – but he took a chance on rates staying at 50 year lows and lost. It happens.
But making a large number of bad loans is not supposed to happen to mortgage companies. They’re supposed to know better. That’s what their business is. Yet they destroyed their companies by making bad investments in people they should never have agreed to do business with.
Rewarding this sort of incompetence is in my view unthinkable. The market should be allowed to eliminate these inefficient companies and let new, better ones rise up in their place.
If Bush were a fiscal conservative he would know this and realize that sometimes it’s better to do nothing. Sadly, that sort has not been seen in Washington much lately.
Cross-posted at The Van Der Galiën Gazette.