Sunday, August 15, 2010

Are home buyers exempt from personal responsibility?

While the Obama administration struggles to prevent foreclosures, Americans with responsible mortgages are left asking, "Where's relief for homeowners who played by rules?" In the middle of the decade, many people were watching their friends' and neighbors' homes wildly appreciate. They determined that they needed to get in on the 'easy money,' blithely ignoring the adage they were taught from childhood: what goes up, must come down.

In the meantime, a few others watched the mayhem in the market and decided not to mortgage their future on what was clearly overpriced housing. They lived in their modest apartments until valuations fell back to a reasonable level, then bought their homes with a fixed mortgage payment they could manage.

No sooner did they buy them, when the feds began creating programs to bail out those other homeowners. Remember those buyers with mortgages so big that they eat up every penny of what would be their discretionary income? How about the ones who got mortgages they could afford in 2006 knowing they might adjust to a level they couldn't afford in a few years but just assumed they'd refinance when that happened? Those were the only ones the Obama administration wanted to fix the game for, baking a moral hazard right into the last market that needs it.

What the housing market needs in its current condition is for the government to keep its hands off of it. Distressed homeowners who have to become renters would have been much better off had they instead been renters all along anyway. If the feds create any incentives in this market, they should benefit responsible home buyers, who will stabilize the housing market.

At least Fannie Mae is going to try and make people take personal responsibility for a "strategic default." Now Fannie Mae gets tough on homeowners who walk away from a mortgage they can afford to pay. Instead of letting them off with the difference, Fannie now gets a court order requiring a defaulting borrower to pay any remaining unpaid portion of the loan after a seized home is sold. To put further pressure on them, Fannie Mae said it would not buy or guarantee another home loan for those abandoning a home to foreclosure for seven years.

But it's not just the homeowners who should take personal responsibility for their commitments. Banks that made the high risk loans should suffer the consequences when the mortgages fail and not be bailed out by the government. Not until all the inflation has left the bubble will the housing market become healthy again.

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