Friday, August 24, 2007

Wary on Mortgage Bailouts

No big surprise here: quite a few of the Democrats running for President have proposed various sorts of vague mortgage bailout programs to assist those faced with foreclosures in the current real estate meltdown.

We're wary of these plans, to say the least. Most likely, any such program--which would be too little, too late in any event--would benefit the wrong people. Who, exactly, are the "victims" of the mortgage crisis?

One group is investors who hoped to make a quick buck "flipping" houses in the white hot real estate market that, until recently, existed in many locales. Using easy credit, they bought multiple properties, but got caught with their pants down when the market--inevitably--crashed. Should they get bailed out? NO.

Another group is new homeowners who purchased their properties with no money down, paying "teaser" mortgage rates well below market prices. When the teasers went away, and their properties failed to appreciate rapidly, they found themselves unable to make the payments. Should someone who put no equity into a home and lived their for however many months at less than the comparable cost of renting be "compensated" for their "loss"? NO. Yes, they're back to renting, but really, they never owned anything to begin with.

Then there are the fraudsters, who bilked unwary lenders out of billions (by some estimates) in various mortgage scams. Neither they, nor the lenders who all too willingly facilitated their schemes deserve to be bailed out.

What about the folks with bad credit who, quite predictably (that's what a bad credit risk is all about) ended up defaulting on their payments? Are they any worse off than they were before?

Of course, somewhere in all this mess are some hard-working people who were duped by unscrupulous mortgage brokers and lenders into risky loans that blew up on them when interest rates rose, and who stand to lose significant equity they put into their properties. These are the folks who deserve sympathy. But do we really think some kind of Congressional mortgage bailout program is going to reach many of them?

Bailing out bad mortgages will only encourage more bad lending practices. What we are seeing now is a much overdue correction in the market. The best thing that could happen would be for existing federal agencies, such as Fannie Mae, to find ways to help homeowners trapped with rapidly rising interest rates on adjustable mortgages. What these homeowners need is a way to refinance, inexpensively, to a stable fixed rate, assuming they can afford the payments. (Unfortunately, the same lenders who were all too willing to hand out money to such homeowners in the heady days of yore are now unwilling to let them refinance.)
The government CAN help out here, but without creating some large bailout boondoggle.

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