Tuesday, August 19, 2008

Hands off the housing market

Whatever happened to the value of personal (or corporate, for that matter) responsibility in the United States? Since when must the federal government bail out every citizen and every corporation for everything?

The federal government is not obligated to bail out either those losing from the deflation of the housing bubble or those going bankrupt from the meltdown of the subprime mortgage market. It should definitely not be doing so with tax dollars. To do so takes taxpayer dollars to reward irresponsible fiscal activity and encourage such activity in the future.

Obviously, anyone who is a victim of predatory lending should be redeemed. The federal government guaranteeing a refinance for the victim, which they wouldn't be any more able to afford, is not the way to do it. Instead, the victim should be exempted from making payments greater than they can afford to the predatory lender or the holder of the fraudulent note. However, before qualifying for exemption, there needs to be an objective, quantitative, and consistent set of criteria established to validate predation.

The federal government should not be bailing out any other defaulting borrowers. They were irresponsible people who got greedy during the inflation of the housing bubble and purchased a home they knew they wouldn't be able to afford. They did so based on the assumption that real estate always appreciates and that they could resell their homes for a profit when their interest rates reset. Fiscally responsible Americans should not have to pay to bail out those financially damaged by that faulty assumption.

The Fed should not be bailing out the lenders of the defaulting loans either. As previously stated, that would reward making loans to people who cannot pay them back, thereby stimulating more such activity in the future. The American economy is not going to collapse if the lenders who made too many risky loans go out of business. On the contrary, it will be bolstered by becoming dominated by the responsible lenders who declined to make loans that the borrower could not afford to repay.

It's true that many lenders won't lose out because they already resold the risky mortgages on the secondary market. The funds and trusts that bought those notes should no more be bailed out than the lenders should. The owners of the funds and trusts should have read the prospectuses before buying shares so they knew the risk they were getting in to. Taxpayers who invest wisely should not have to pay for the losses of ignorant or greedy investors. The economic system would be churning along just as it is now had Bear Stearns not been bailed out.

People need to take personal responsibility for their actions. Defaulted loans should be foreclosed on, not rescued with tax dollars. The homeowners will lose their homes but they should be renting their homes anyway because they cannot afford to buy. Failing lenders should go bankrupt, not be bailed out by the Fed. There are plenty other responsible lenders to provide mortgages to responsible borrowers. When this happens, property values will drop back to intrinsic levels. Those who are now renting their homes because housing values have been artificially inflated by low interest rates and irresponsible real estate speculators will finally be able to buy their own homes.


Anonymous said...

Anyone with an I.Q. above single digits could see that this was a bubble real estate economy gone mad. Refi hucksters dazzled homeowners with visions of new cars and big-screen TVs, and home buyers were duped into buying into a speculator's market that was doomed to implode. Anyone who has done a lick of reading about the history of real estate in America knows it has been characterized by boom and bust cycles. Anyone trying to "get rich quick" without investing in any of their own money is a sucker. No, the government shouldn't bail out these rubes, nor should it bail out the lenders who were all too quick to make these lousy loans. But, just like the S&L mess, there will be too much political pressure to stand by as people and institutions go down the tubes. Get the bucket and start bailing.

Anonymous said...

I thought this was the "Progressive Zone." Isn't the progressive movement all about government taking postive steps to better people's lives? Let's put the real estate speculators aside for a moment. There are many forces converging right now to give our nation's economy the beat-down. Shouldn't government try to do something to help when working men and women suddenly find themselves in trouble? Or do we just stand by and say its just economic Darwinism at work? How about some compassion?

The Progressive said...

To Anonymous number two, a Progressive advocates using enlightened methods to make progress towards better conditions, but government doesn't necessarily need to play a role in that progress. In fact, sometimes more progress can be made when government is left out of the equation.

But even if you want government to take positive steps to better people's lives, bailing out greedy working men and women when their irreponsible fiscal activity lands themselves in trouble is not the way to do it. It's actually a negative step because it rewards irresponsible fiscal activity and increases the probability that those home "buyers" (or, more accurately, "debtors") will make greedy purchases again in the future.

I'll repeat, anyone who is a victim of predatory lending should be redeemed. But let's face it, most people now going through foreclosure read their contract and understood the terms. It doesn't take a rocket scientist to realize that if you can't afford a home with a thirty-year fixed loan, you certainly can't afford it with an option ARM that will reset at an even higher APR than the thirty-year fixed loan.

These debtors just assumed that their homes would perpetually appreciate, so they'd always be able to simply sell their homes for a profit when their loans reset. Fiscally responsible tax payers' dollars should not be used to bail out people losing their homes for relying on such an absurd assumption.

Russell Snyder said...

Let's not forget all the fingerprints on the tax code changes that opened the door for predatory lenders. When they eliminated the tax deduction on interest payments on consumer debt, people drifted over to home loans as a way to generate cash, and tax deductions, to pay for a better lifestyle. Sure, this wasn't sustainable, but I don't hear anyone stepping up to claim responsibility.