Question of the Day - Foreclosure

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Question of the Day - Foreclosure

By JLP | April 18, 2007

Here’s the opening paragraph from an article I found this morning:

WASHINGTON (Reuters) — A leading member of the Senate Banking Committee is drafting legislation that aims to assist mortgage borrowers now facing foreclosure, sources familiar with the work said Monday.

You can read the complete article here.

More from the article:

The National Community Reinvestment Coalition is pushing lawmakers to create a national mortgage rescue fund to help troubled borrowers and wants mortgage lenders to delay foreclosure action until a loan is more than 60 days late.

Okay, now here’s today’s Question of the Day:

Do you think the government (we the taxpayers) should get involved in bailing out troubled borrowers?

Am I the only one who thinks this is a dumb idea? Instead of spending money on a band aid, why don’t we instead educate people? Or, will education even work?

I don’t think bailing people out of a situation that they got themselves into is the answer.

Topics: Credit, Housing Market |

Comments to “Question of the Day - Foreclosure”

Tom Says:
April 18th, 2007 at 11:54 am

As long as we continue to bail out big business, there is absolutely no doubt that this makes sense. (The airline and insurance industries post 9/11 come to mind.) If that were not going on it would be a bit trickier, but it seems clear to me that individuals who were misled (not all of them, but some) are more deserving than huge businesses whose stated goal is to get as much of our hard earned money as possible.

But yes, more needs to be spent on education as well. That should the priority, to prevent this from happening again.

Chris Says:
April 18th, 2007 at 12:06 pm

I can’t imagine a large percentage of these people were intentionally ‘misled’ or scammed into bad mortgages. There has to be some personal responsibility here. If they were scammed, there needs to be an investigation and then those people can be assisted with refinances to more stable loans.

But I don’t want tax money going to help someone who signed up for an ARM and is now complaining that their interest rate is too high, especially if they pulled cash out of their equity. We pay enough for people’s stupidity with all these lawsuits driving up prices.

plonkee Says:
April 18th, 2007 at 12:25 pm

Well, if its buy legislation that forces the lenders to take action less quickly, thats not too bad. I’d be a little annoyed people got handouts, but on the other hand if they go into foreclosure and then become homeless, wouldn’t some arm of the government step in and help them?

I-Gor Says:
April 18th, 2007 at 12:34 pm

Why should I pay for someone else’s stupidity? If a borrower was scammed into one of these loans, then let the courts sort it out. If a borrower bought more house than he could afford, then the government has no business subsidizing him after the fact.

My wife and I diligently saved up for a down payment and hope to buy at the end of this year. Why should someone who refused to do things the right way be rewarded? In addition, government interference would only artificially inflate the housing market - and, in effect, punish diligent people a second time by increasing the amount of money they have to spend on a home.

samerwriter Says:
April 18th, 2007 at 12:45 pm

Sure, let’s bail them out. Then next year, we can bail out all those people buying SUVs who can’t afford them. After that, we’ll bail out the people with big-screen HDTVs. Heck, why not just declare an amnesty on all credit card debt while we’re at it?

Give me a break. Bailing out irresponsible people *punishes responsibility*. If we bail these people out, I am not only paying for my own house, I’m paying for someone else’s as well. The very idea infuriates me.

JLP Says:
April 18th, 2007 at 12:54 pm

Some great comments here.

Tom,

Bailing out these borrowers would be the same thing as bailing out the lenders (big business). The lenders don’t want to foreclose. It’s expensive and it is a major pain.

Plonkee,

I’m sure there are some people who are so messed up in debt that homelessness is a possibility. However, most of these borrowers will simply need to downsize by selling their house and renting until they can get back on their feet.

Chris, I-Gor, and samerwriter,

Every one of you reinforced my sentiments.

D Says:
April 18th, 2007 at 1:12 pm

Better yet, to not be partial we should send each and every American Home Owner a HUGE check. Why should the people whom have done the right thing be punished for the ones whom did not?

All for one and one for all.

eR0CK Says:
April 18th, 2007 at 2:37 pm

Nope.

Shouldn’t help the ignorant consumer or the poorly run/managed big business.

bob Says:
April 18th, 2007 at 3:11 pm

Seems to me that the government is trying to avoid a complete meltdown of the housing industry. Lets see the dominoes fall: A large number of people have their houses foreclosed, so banks put a large number of foreclosed houses on the market at discount prices. This causes the prices for existing homes to decline further than they already have… Could be bad news if you have to sell your house for a loss. Its also bad news for house builders if there’s a glut of unsold houses on the market. People will be reluctant to buy into a declining market, and the banks will be pickier about who to lend money to…

Am I pissed at this mess? You bet. Do I think it’s right to bail out silly people who overextended? No way. But I also don’t want to see the whole economy tank because of this…

db Says:
April 18th, 2007 at 4:26 pm

WELL — if this goes through I have every right to be ticked for having been the responsible one and opted NOT to become a homeowner when I clearly was a bad credit risk. Great, reward all the ones with no ability to control their desires and doubly punish me, the one who remains a renter diligently saving my downpayment money and repairing my tattered FICO score.

Renters are going to get shafted since we’ll all pick up the tab for this one and we don’t have a tax-writeoff.

After this bailout I think we should bail out everybody who has ever gotten a student loan above and beyond their ability to earn a salary. I could be at the front of that handout line.

Foobarista Says:
April 18th, 2007 at 8:23 pm

The taxpayers shouldn’t. This is a textbook example of the economic idea of moral hazard. OTOH, the lenders themselves may want to figure out a way to deal with this - and they should, if they value their investments and don’t want to own a bunch of depreciating real-estate.

dimes Says:
April 18th, 2007 at 10:09 pm

HECK NO. I really don’t believe the whole economy is going to tank because of this. The people who got themselves into these messes need to SUFFER or figure out how to solve their problems. The lenders who gave too much to people who couldn’t afford it (Casey serin, along with millions of others) need to SUFFER or figure out how to keep this from happening. The greedy need to suffer rather than demand bailouts from those of us who have done everything right (and really, that’s the MAJORITY of us). Why should the taxpayers have to bear the burden of the greedy and/or stupid?

Gaming The Credit System Says:
April 18th, 2007 at 11:51 pm

Even though I’m on the record as blaming the mortgage companies more than the borrowers for the whole mess, I am firmly of the belief that these people are responsible for their own problems, and they should not be bailed out by the government. Neither should the mortgage companies, or any other companies, for that matter.

traineeinvestor Says:
April 19th, 2007 at 5:38 am

Why should tax payers be expected to bail out the stupid and the greedy on a selective basis? Even those who are neither stupid nor greedy do not merit a bail out. People lose money and get into financial difficulties for all sorts of reasons but there is not and cannot be any expectation either that everyone should get a bail out or that special groups should. Economic risk is one of the features of a capitalist/free market economy. Take away the economic risks and you have moved to a different economic system. Bailing out selective groups/risks is not doing away with the risks - it is simply transfering the cost of cleaning up the mess onto others (usually current and future taxpayers). That is neither fair nor equitable and, as foobarista points out, creates a moral hazard as well. One consequence that is usually overlooked is the effect on the cost of future economic activity through additional regulation and influences on economic behaviour

The only universial exceptions I can accept are (i) a bankruptcy law that allows individuals to effectively start over after a period of time (which most developed countries have in one form or another) and (ii) limited protections to certain classes of creditors on an insolvency.

I disagree with most of the other bail outs, insolvency preferences and protections which exist or have been used(although I will concede that at least some of them have a logical basis)

Of course political interests ensure that bail outs are made from time to time. That does not justify further bailouts.

Jon Nichols Says:
April 19th, 2007 at 8:01 am

“huge businesses whose stated goal is to get as much of our hard earned money as possible”

I’m not sure that’s really their stated goal. But if that’s business’s stated goal, then I would say that most people’s stated goal is ‘to work as little as possible to get lots of stuff’.

As for bailouts, they’re just as wrong for companies as they are for individuals. Government bailouts of airlines have had a significant detrimental effect on the entire industry (and consumers). When we bail out, the incentive to do the right thing is reduced. I decided not to buy a house because I thought the market was overheated. Government interference will cause house prices to remain artificially high, and punish my sound judgement. Is that what we want?

bluntmoney Says:
April 19th, 2007 at 8:58 am

No, I don’t think we should bail out borrowers, or the lenders either for that matter. I haven’t read too much on the subject, but the articles I have read don’t talk specifically about bailing out the borrowers — instead, they talk about bailing out in general, similar to the S&L bailout. I had relatives who were affected by the S&L bailout, and what happened with that was they got back PENNIES on the dollar, while presumably the Savings & Loans did better. I wouldn’t be surprised if a mortgage bailout worked similarly.

after bankruptcy Says:
April 19th, 2007 at 9:57 am

Another example of our society telling people that “nothing is your fault”. No one takes accountability anything anymore.

“I got in a bad mortgage deal and can’t pay…it’s not my fault, someone should help me”

Owning a home is a privilege, not a right.

I agree, spend the money on education. Teach high school kids about credit, mortgage and personal finances in school. Though I doubt the finance lobbyists will EVER let that happen.

tinyhands Says:
April 19th, 2007 at 1:33 pm

How many of the commenters actually know any of the people requiring bailouts? I don’t know anyone needing government intervention, and I doubt you do either. So I think it’s unfair to jump to the conclusion that they’re ALL deadbeats just trying to get something for nothing. Yes, some of them probably are, but you don’t know that.

I haven’t been following this story THAT closely, but I haven’t heard a single distressed person saying that it was someone else’s fault and that the government should just GIVE them money. The only thing I have heard is people who ALREADY OWN HOMES railing on the people who are losing theirs.

Your first reaction should be compassion. The government exists for the benefit of the people and there are hundreds of other welfare/bailout programs. I don’t want to pay for someone else’s misdeeds and I’m not really wild about paying for their misfortune either. But my individual share is probably LESS than what I would give to a bum on the streetcorner (assuming I gave money to bums on streetcorners). And God forbid any one of you ever needs help.

JLP Says:
April 19th, 2007 at 2:15 pm

tinyhands,

Please don’t mistake the fact that we don’t want a government bailout for lack of compassion. I feel badly for those who might lose their house. However, that doesn’t mean that I think we should bail them out of a situation that they got themselves into.

Also, don’t think for one minute that Senator Jack Reed is doing this for any other reason than to help his political aspirations all at taxpayer expense.

sam Says:
April 19th, 2007 at 3:16 pm

It isn’t in the mortgage company’s interest to foreclose on bad loans if they can help it. After all they are stuck with property that they have to sell (probably at a loss) and lose the income stream from the mortgage payments. It makes more sense for them to help the borrowers along somehow to refinance or restructure, and prevent default. That way the gov’t and taxpayers don’t need to get involved. It is also in the interest of the mortgage companies to keep the gov’t out of their business. If they are smart, these companies will do everything they can to solve the problem themselves. Too many people out of their houses on the street will cause the gov’t to act, and I can guarantee you the result won’t look pretty.

Buz Says:
April 19th, 2007 at 3:38 pm

They could just keep interest rates low. A lot of people who are having trouble bought the most house they could with the least down.
Some even have interest only loans. To me this means that not only were the consumers shortsighted but the banking industry as well. While I agree that NOT bailing out these people could contribute to the collapse of our economy, bailing them out would reinforce the notion that their practices are fine. This could easily spiral into a REALLY big problem. I mean - if the taxpayers will bail me out what’s to keep me from buying the biggest house I can and getting the taxpayers to pay for it?

Independent George Says:
April 19th, 2007 at 4:08 pm

We’re talking about 3 subgroups here:

(a) people who will have to make significant cutbacks to their quality of life to keep their homes.

(b) people can’t pay their mortgage, are forced to sell at a loss, and have to make significant cutbacks to their quality of life to pay off their debts.

C is the only situation where government intervention might be justified, except that there already is a protection in place: bankruptcy. We’re not talking about kicking people out onto the streets; we’re talking about hurting their credit rating and forcing them to (gasp!) rent.

Ironically, while I’m pretty sure there’s a consensus that A & B are the least deserving of intervention, they are, in fact, exactly whom the bailout is aimed towards. This is not about helping the poor, it’s about buying votes from the middle-class.

JLP Says:
April 19th, 2007 at 4:14 pm

Independent George said:

“This is not about helping the poor, it’s about buying votes from the middle-class.”

You’re exactly right!

Terry Says:
April 20th, 2007 at 7:20 am

I do not think they should bail these people out. Many of them knew better. Did they think that low interest arm was going to last forever? They knew it wasn’t. Why buy a house you could barely afford at the low interest rate only to know it is going to raise in 5 years or so. I feel bad for the kids who are worried their going to be living on the streets. Because you know kids listen to their parents converstations when you think they aren’t.

tinyhands Says:
April 20th, 2007 at 10:39 am

Sorry, I kicked into rant mode there and didn’t mean to impugn anyone’s character in particular.

I don’t think everyone who needs help is necessarily in a position into which he got himself and I don’t think everyone knew better. I don’t know if we should bail these people out, but where do you draw the line? New Orleans was built below sea level, shouldn’t they have known better? Florida got hit by 5 hurricanes in one year. Kansas & Nebraska make up the bulk of ‘Tornado Alley’. Closer to home, thousands of Enron employees (and I know a few) had the bulk of their savings in Enron stock (ie, eggs in one basket). The IRS extended the deadline for people affected by the tragedy in Blacksburg. The list goes on and on of cases where bad things happen to good people and the government (right or wrong) helps them out.

I don’t want to be the one to decide where to draw the line between helping out and collectively shrugging our shoulders.

Big Bill Says:
April 20th, 2007 at 11:55 am

I would expect people to who frequent financial websites to be incredulous that people make bad financial decisions. After all, we’re interested enough in personal finance to read blogs about it! Of course, I’m not an economist, but I would think that people interested in fanance would want to think a little more big picture about this. How are all these foreclosures going to effect the economy? If there’s a good chance that bailing people out will help strengthen the economy, then it could ultimately help our bottom lines and make us more money. Just because it seems like someone else is getting something for free (even though it’s infuriating) doesn’t mean that it couldn’t help us in some way.

Foobarista Says:
April 20th, 2007 at 2:43 pm

I think the government should leave well enough alone. Helping the borrowers is really meant to help the lenders. Only if the lenders take a severe haircut will they learn their business lesson and not produce crappy financial products.

Ironically, the sheer scale of the problem means the lenders will have to work with the borrowers to repair the loans, unless the lenders sense the chance of a government bailout. Then, they’ll happily take the taxpayers’ money and get ready for the next disaster. The lenders don’t want to own vast tracts of houses that they have to sell at a loss; they’d be far better off as businesses working out things with the borrowers. But they’d be even better off getting a huge windfall of cash from the taxpayers.

K Ration kal Says:
April 21st, 2007 at 11:41 pm

The gov’t is obviously feeling guilty for using 1st time homebuyers as a tool for driving the economy. They did nothing to limit the type of creative loans being bestowed on the unsuspecting neophyte homebuyer. Now reality hits and a bailout is offered. I have to admit, I’m sympathetic to the recepient of one of these fancy loans.

Mighty Bargain Hunter » Roundup for week of 15 April 2007 Says:
April 22nd, 2007 at 9:43 pm

[...] All Financial Matters has foreclosure in mind for his question of the day. [...]

Independent George Says:
April 23rd, 2007 at 12:06 pm

If there’s a good chance that bailing people out will help strengthen the economy, then it could ultimately help our bottom lines and make us more money.

Except that it doesn’t strengthen the economy - it just delays the pain for a little while longer, and makes all the more worse when it finally hits. A bailout is the equivalent of paying your visa bill with your mastercard.

Marc Says:
April 28th, 2007 at 2:22 am

Oh, I can’t wait for myself and my 3 children to suffer because I bought the American Dream and got an ARM, with a huge down payment to buy an inflated house in California. Sure, I was insured the value would go up so I could refinance into a lower fixed rate. WOOPS, two years later the value has tanked. It’s nobody’s fault except for mine thinking the American dream would buy me security, whoo, was I wrong. Should have kept renting.

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Question of the Day - Foreclosure