Are people who contracted for mortgages which they couldn't afford, and should reasonably have known that they couldn't afford, entitled to expect relief from the government when they're faced with foreclosure? Are people who signed for mortgages which they could afford, but then lost their jobs, entitled to such relief?
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Jeffrey L. Seglin, author of The Right Thing: Conscience, Profit and Personal Responsibility in Today's Business (Smith Kerr, 2006), is an associate professor at Emerson College in Boston, where he teaches writing and ethics. He is also the administrator of The Right Thing, a Web log focused on ethical issues.
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Host Bail-Out? Can't take the pool with you when you go...
I don't know where to begin at how many wrongs there are with this idea: First, perhaps instead of a bail-out, offer smaller homes to these people, make them take economics and business sense classes in order to comply with the small house offer. Insurance is a must. People have to learn to drive and take a test. How about homeowners? Where is their test?
My husband and I scrimped and saved and bought a little house. Guess what? It is paid off and we have less 'stuff' because there is no room to put it. Where is our reward for NOT putting America into this crisis? We have a savings account. We own our vehicles. We have degrees from college and did not need to impress our friends with material goods. We donate. We tip. Bummer, we don't have a pool but you can't take that with you when you go. Bail-out? How about tax vacation for us who do not drive Volvos and have kids at private school and go to Disney?
Re: the housing bailout question, in order to answer the question, one must decide if they view the U.S. as a place where people are free to purchase a house but have to realize that such a purchase brings with it the responsibility to only make such a purchase if their income is such that whatever the terms of the mortgage are, the home buyer can reasonably expect to repay the loan. What brought the country to the disaster we now find ourselves is that, at the encouragement of succeeding Democrat Administrations, persons were encouraged to purchase homes they could not reasonably expect to pay mortgages on and banks and mortgage companies were by force of law (The Community Reinvestment Act) to make such loans. Banks and Mortgage companies had no choice in this matter, they had to make the loans, whether or not the purchaser could reasonably afford to make the payments. Thus, we have now arrived, when the housing bubble burst several years go, that the persons who purchased the houses above their ability to repay and the banks and mortgage companies and all the associated financial institutions involved in these transactions have begun to fail.
Now we come to the question raised in today's column. There are two questions raised - Can there be a bailout of (1) persons who bought houses they could not afford and (2) persons who could afford houses they contracted to buy, but who have subsequently lost their jobs and cannot afford now to repay the loans.
Politically, we have seen the Democrats making decisions that all of these bad loans to customers who lose their houses to foreclosure must be bailed out. From a human point of view, it is difficult and heartbreaking to see families faced with foreclosure and loss of their houses, especially when it involves persons who have lost their jobs as a result of the economic downturn recently. However, as sad as these dilemmas are, the country will not be able to sustain having the government bail out all of these former homeowners. The government will not be able to bail out the homeowners and still remain solvent, regardless of what the Democrats tell us. Therefore, as difficult as it is to take this position, I believe the government should not bail out former homeowners in either the instance where the former homeowner purchased the home and went in over their heads knowingly and face losing their homes OR lost their jobs and face the same sad outcome. There is not enough money in the country's treasury or abilty to raise monies to bail everyone out who lost their homes for whatever reason. The same question could be asked as to the ability of persons to pay for their food, their living expenses, their children's college tuition, and so on. This country was founded on the principles of the ability of its citizens to take care of themselves through the sweat of their own brows or their ability to earn their living. This is the essence of the American way. The country cannot survive if the government thinks it can bail out its citizens every time a family runs into financial hardship.
Bailout? Probably not. Jail for the real estate brokers, mortgage makers, bankers and underwriters? Probably.
Offering bailouts for homeowners with excessively high payments is not a good thing to do for sure. But I don’t think the “bailout” is going to the homeowners, I believe it is going to the banks. Trickle down economics isn’t a part of this situation as it wasn’t for Bush’s economic plan. But homeownership is an emotionally charged issue upon which the mortgage companies preyed. Knowing full well that given the opportunity to buy the home of their dreams rather than the home of their economics the typical American would go for the bigger place. Americans by enlarge don’t understand economics. Economics is taught in our schools as an elective, economics in life is a necessity. The mess we are in is from our trained desire to want everything now. Delayed gratification is not an element in the American lifestyle. Think back to 9/11. The one thing our former president asked of the American people in response to the attack was: go shopping; if you don’t the terrorists have won. What sort of message was the to send to a population in shock? For every emotionally charged shopper there are many sellers waiting to take advantage of their desire for gratification.
My suggestion would be why not force the banks that made the ridiculous loans in the first place be required to go back to each mortgaged home and renegotiate the rates and payments to a reasonable level. This way, the banks wouldn’t have foreclosure properties on their books and the homeowners would be able to keep their homes more easily. So far the only people getting bailout bucks are banks…where is their culpability in the whole financial meltdown? Where are the ethics in all the homeowners giving up their homes to foreclosure when the bank owners and executives get to walk away with million dollar bonuses? If the banks say they didn’t know about this growing problem, they are lying or at least incompetent. Our system failed and the victims are the people who were supposed to rely on the system to guide them.
So to take a stand, yes or no, on your question, I cannot as I am not sure it is an accurate question. Come back to me when the foreclosed homeowners are actually in line to get some direct relief.
Thanks for raising the question, however.
Like some of the other posters here have pointed out, this is actually a series of problems. Just as a number of different factors led to the current lending crisis, so there can be no "one size fits all" solution. However, surely there are a some broader measures that Congress can enact that will provide relief without requiring the taxpayers to foot the bill.
One example would be to require all current ARMs (whether directly held or securitized) to be converted to fixed rate loans with an interest rate of, say, the lesser of LIBOR + 5% or 7.0% (just as an example). Lenders could be afforded certain protections, such as (a) requiring the borrower to prove they could reasonalby make the restated payment (say, 35% of their gross income), (b) making this a conversion, not a refinance (i.e. the remaining terms of the loan, including the principal balance and maturity date, would remain unchanged), and (c) including a stiff prepayment penalty clause (say, 5 years), which would give borrowers a disencentive from either refinancing or selling their homes once equity was restored. Since lenders would not be required to afford any principal forgiveness, the only thing they would be losing would be future interest income, and then only if the borrower would not have defaulted within the five year period.
As for borrowers who went for "teaser rate" loans that they couldn't afford once they reset, while I hate to see anyone become homeless, I think that lenders who preyed on unsophisticated borrowers are just as culpable as the borrowers themselves. Just as you shouldn't buy more car than you can afford to own, maintain and insure, the same goes for your housing. Yes, it was probably a big step up in the world to move from a shoddy apartment into a nice single family home, but there was probably a reason that all they could afford in the first place was a shoddy apartment. I don't mean to sound unsympathetic to people wanting to better themselves, but it's time for America to re-learn what it is to live within our means.
On the issue of Congress handing banks big wads of cash, this is only going to work if the money is immediately made available to the public in the form of available and affordable credit. Although as a country we do need to learn thrift and we do need to increase our savings rate, we also need an available pool of venture captial, which can be used to start new businesses which will, in turn, create jobs. Congress needs to do a better job of ensuring the bail out money they have pledged does the job it was intended to do.
I didn't mean to leave such a long post, but as you can see, the topic involves many related and complex issues.
No, people that committed to a mortgage that they could not afford should not be given relief. They need to take responsibility for their actions. Interest rates did not skyrocket - they are at historic lows. A big cause of this country's economic problems are people living beyond their means.
I empathize with people that are facing foreclosure because of a job loss or other life disaster - such as a major medical problem or divorce. These are things over which a person has little or no control. People in these circumstances should be able to renegotiate their mortgages.
What really gets me though are the folks that can pay their mortgages but are choosing not to because their homes have "lost value." They either walk away or demand the lender to renegotiate their loan. I am sure these people did not call their mortgage company to renegotiate their loans when housing values went up - why do they feel justified demanding new loans because their house values went down??
This is a very complex problem - there is enough blame to go around - people spending beyond their limits - brokers only interested in their commissions - the government pushing to increase homeownership. I am not convinced a bailout will change anything.
people bought houses they knew they could not afford and lied on their application. Why should
people who are responsible bail them out. Also people used their
houses as their personal bank to
use their equity for vacation, boat,rv, vacation home, etc. etc.
Let them suffer.
I guess I was raised in a bygone era. My family had no money. My Dad ingrained me at a young age (1) not to buy anything I could not afford (2) if I wanted something to save up for it; (3) you should have 6 months living expenses in the bank in case something happened. While I feel those who sold the subloans should be prosecuted, I do not feel the government should bail out homeowners who wanted to buy into the American Dream but couldn't afford it. Nor do I feel those who have lost their jobs should be bailed out. Our culture has adopted the "I want it now" attitude. The decline, and in some instances, the lack of ethics, morals and personal responsibility has in large part contributed to our current and dire circumstances.
This problem is, as several posters have pointed out, a complex one. And it is not "Democrats" vs "Republicans"-- this was largely incubated by Greenspan.
Housing values have been way too high for a LONG time, and low interest rates (and Wall Street greed)created a form of lunacy. see http://vimeo.com/3261363
As for the "let them suffer" refrain-- the more families their homes, the less the homes of the "rule following" homeowners lose value--and those displaced do have to live someplace. Also, homelessness is a societal burden. So punishment does not seem viable here.
The solutions needed here will be spiritual, not a new twist on old formulas.
Brokers and bankers got very rich with this madness, but we, as a society still seem to believe if you are rich you are receiving a thumbs up from God and if you are poor you are morally lacking.
Bernie Madoff is a bad guy (he is) but the investors who were less greedy (and they were greedy) are victims. Not really.
We are ALL complicit i one way or another, and we are all in this together. We can no longer afford blame and us against them. nor can we afford self righteousness.
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