Monday, May 19, 2008

Are the Mortgage Crisis Bailouts the Right Choice?

We have become a society optimized for mediocrity. Our public school systems continually turn out poor academic performance and, instead of pushing harder and reaching higher, we lower our standards. Unions put upward pressure on wages for jobs that can be done at a fraction of the cost overseas; instead of giving people the right to work, we whine about the loss of domestic jobs and beg politicians to impose harsh tariffs on international trade. Our cost of health care has risen dramatically in the last decade, but instead of curtailing frivolous lawsuits and increasing cost sharing (thereby making demand for heath care services more of a function of their cost) we expect the government to step in and pay. So it certainly comes as no surprise that the government is set to bail out the ailing housing market.

During the last economic downturn following the 9/11 attacks, the fantastically terrible accounting scandals, and the tech bubble bursting it was the housing market that seemed a paragon of the market. Yet amid the housing upswing, a wary few warned of an impending housing bubble being inflated by the low interest rates and readily available "creating financing." We blindly marched forward purchasing homes and driving prices to unprecedented levels. Home appraisals often came in below the contract price and buyers gladly paid the extra money out-of-pocket or with more "favorable" loan options. The unscrupulous lender using a shady appraiser to make the numbers work was a common occurrence.

Now people are beginning to see the light. The housing market has ground to a staggering halt in most parts of the country. Those attractive interest first loans, short-term fixed, and ARMs are rearing their ugly heads as borrowers, already pushed to their financial limits, watch their monthly payments climb amid myriad other rising costs. They can't refinance because their homes are worth less than their current mortgage debt. Furthermore, their insolvency is ruining their credit and they are at the brink of losing their homes to foreclosure.

Should the government bail these people out? It certainly seems like the humane choice. There certainly are people who were responsible and did not buy more than they could afford or overpay for their home but hit a stretch of misfortune nonetheless, but this has been happening throughout all time. Are we now to bail out anyone who has a stretch of bad luck? No. Then why are we preparing to bail out people who knowingly made poor financial decisions? Is this not rewarding greed?

Many argue that people were misled by lenders. This is true; many were and those persons and corporations should be held liable to the extent possible. Yet there is still the onus of responsibility on the borrower. There are two parties to any transaction and both must perform their due diligence. Of course, I am not surprised people over estimate their ability to afford a payment and fail to understand the ramifications of the agreements they're signing, after all, they were probably "educated" in our public school system. We are lucky if they know how to balance their check books, much less understand a variable interest rate rider.

Politicians in my own state (WA) have proposed such prophylactic measures as mandatory financial counseling provided by the loan originator before the loan can be closed. You would get the pleasure of a loan consultant reviewing your detailed financial information and determining if you can afford the mortgage. While this might be a nice optional service, I certainly do not want this type of infiltration into my personal finances. Not to mention the oversight of my decision making. Furthermore, if the lenders are unscrupulous to begin with, why would one expect their financial counseling to be any more genuine than their sales pitch?

In short, this country does not need more bailout to incentivise further mediocrity - we need some lessons learned the hard way.


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