This is exactly how I feel!

There’s a mortgage loan bailout package making progress through Congress right now, which annoys me beyond belief. The following letter to the editor from the Wall Street Journal captures the beginning of my irateness over the situation:

“I purchased the small house in which I currently reside in October 2001.  I did my homework to figure out how much house I could afford and the sacrifices I would need to make to pay my mortgage and other expenses related to owning a home (oil, gas, etc).  I read my mortgage documents and knew exactly what I was getting into.  I didn’t treat the equity that I had in my home like an ATM and have never missed a mortgage payment.  Where do I go to have my mortgage balance adjusted by the federal government?”

Matthew J. Meehan, Lake Grove, NY”

This is only the beginning, though! Not only to I not get my balance adjusted, but now I’m being asked to pay for other people’s irresponsibility. Sheesh!

Proponents of the bill argue that borrowers who signed up for subprime loans had no idea what they were doing. They didn’t understand the loan documents or didn’t read them. (Boo-hoo! Rewarding stupidity will not encourage parties to enter contracts responsibly.) Yes, some borrowers may have been victims of predatory lenders, whose stocks have already surged on talk of a bailout. But many more borrowers simply gambled on risky loans in hopes of flipping property for big profits or knowingly lied about their income just to get a bigger house. (Hmmm...rewarding liars and gamblers? Let’s just reimburse Vegas losses while we’re at it. Idiocy!)

Politicians try to exploit your emotions by saying they want to help people “keep their homes.” But remember that the people in financial trouble already had places to live. They got into this mess by trying to buy bigger and fancier houses than they could afford. If we do help them, it should involve them moving back into houses they can afford. No one will be out on the street. Anyone who could pay a mortgage can pay rent, which is much less.

The proposed bailout is a moral hazard. It encourages the bad behavior that got us into this mess, because the punishment for foolish borrowing is applied to you and not to the people who made the bad decisions.

Bailing out borrowers also means bailing out their lenders. If lenders have to foreclose, then they have to sell the house for less than the loan amount, and this means an actual loss to the lenders. That threat of loss gives lenders a motive to help borrowers by restructuring the loans, maybe extending the time to repay. On the other hand, using our tax dollars to keep people in houses they cannot afford would be “socializing” lenders’ losses, meaning taxpayers like you and me would be paying the bill and guaranteeing the profits of predatory lenders. (Can you hear me pulling my hair out?)

Under proposed bailouts, responsible people lose and have to give their money to gamblers, liars, and sleazy lenders. This is privatizing profits and socializing losses. It doesn’t matter if you have been dutifully paying your monthly fixed-rate mortgage. It doesn’t matter if you bought a smaller house based on what you could truly afford. And it doesn’t matter if you’re a renter who chose not to jump into the housing mania. Congress is proposing to make it your job to pay up for others’ irresponsibility.

If you’ve got some time, please contact your representatives and ask them to stop this foolishness. Tell them to let the market correct itself. Tell them that it’s okay for people to rent instead of owning. Tell them to punish predatory lenders, but not to punish you and me for things the lenders and borrowers did. Thanks.

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I risk writing a comment that is longer than you post, but here goes.

I agree with absolutely everything you said. That’s part of what makes this so complex.

The trouble lies in large numbers ... if there are millions of people/homes/mortgages in this situation (and there are) the costs add up to such a huge number that the entire economy can be threatened.

If banks start failing, if mortgage companies start failing, then the confidence you have in them fails and you want your money out ... and when that happens in large numbers ... you get an economic meltdown we haven’t seen in this country for a hundred years.

When that happens, you freeze the housing market because no one will make loans at all. The credit markets simply dry up. You couldn’t sell your house because no one could buy it.

You get a domino cascade which could take decades to work our way out of.

So the bailout is targeted to protect the economy from a catastrophic meltdown. But the trick is to do it thoughtfully so we don’t reward bad behavior (buying more than you can afford, loan companies seeking greedy profits from unfit practices, and so on.) Complicated!

This is great to read from a Western Washington Lefty. You sound like an evil capitalist libertarian like me. Now there are two people in King County who understand moral hazard and agree about this.

DQ nailed it...For better or worse, I think this will force mortgage lenders to become stricter instead of giving money to anyone with a pulse.

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