Monday, October 01, 2007
A Mortgage Bailout Would Send All The Wrong Messages
One of the marvels of the American way of life is its foundation in common sense. American principles are such a universal part of the human experience that it doesn’t take much in the way of communication to remind us of those principles. In fact, over the years, much of what we believe as Americans has been codified in easy to understand admonitions.
For example, in light of the recent news of many homeowners across the country falling into default on their home mortgages, admonitions like “live within your means,” “buyer beware” and “what goes up must come down” come to mind.
These particular admonitions are known to most Americans and it’s likely nearly every mortgage holder now in default not only heard them often but probably even thought of all three principles before blatantly ignoring them and signing up for a very risky mortgage.
Under the circumstances, it’s not entirely surprising that President Bush and many members of Congress are floating possibilities of a bailout. After all, everyone makes mistakes and mortgage default is a very painful and far-reaching one for those involved.
But America would be much better off in the long run if the free market is allowed to run its course instead of circumventing it through a government bailout that would only compound the problem.
How do you think a bailout would be received by the millions of Americans who actually bought into the philosophy that they ought to live within their means—and did?
Or what would it say to those who bought into the philosophy that buyers should be wary of promises from sellers who have a tendency to gloss over or even purposely understate potential risk?
And consider the message a bailout would send to those who understood that housing markets are known to take off like a rocket before plummeting back to earth—almost always leaving many risk-taking mortgage holders with more debt than equity.
It should be clear to everyone—including President Bush and members of Congress—that a bailout would be a real slap in the face to millions of Americans who resigned themselves to staying in their current rental units or existing homes because they understood that a variable rate mortgage is often a financial time bomb waiting to blow up in the holder’s face—especially when starting interest rates are lower than common sense can explain and housing prices are headed for the stratosphere faster than a space shuttle.
It’s undoubtedly true that some unscrupulous lenders lied about terms and tricked borrowers into loans they would not have signed had they known the truth. And most Americans would agree that government agencies have a responsibility to prosecute lenders who have broken the law and obtain restitution to the extent possible from the assets of the lawbreakers.
But a government bailout of mortgage holders who knowingly and willingly entered into perfectly legal but obviously risky agreements would be a bitter pill to swallow for anyone who played by the rules and thereby lost out on an opportunity to substantially upgrade their circumstances through a government handout. And, to add insult to injury, taxes collected from those who actually had income to tax because they lived within their means would fund the bailout. How’s that for a double whammy? It’s kind of like getting slapped in the face and then kicked in the rear for doing what’s right.
I hope some sanity prevails in this debate. Intervention of any type is unwarranted, but if President Bush and Congress insist on spending our tax dollars to provide subsidized housing—and perhaps buy some votes in the process—we would all be better off if they sent the subsidy as a reward to those who played by the rules and not to those who ignored them.