I have heard many on the left, and some on the right, hoping to help "unfortunate" borrowers who took loans that were too big, or gambled on ARMs and now find their rates rising, or whatever other situation is the sob story of the day. This is not only a risky policy economically, but it is also simply wrong.
What is so wrong about it? I suppose nothing if you believe the "predatory lender
" stories, but I have never been able to make sense of that argument, or the matching "Wall Street greed
" tale. What I see are gamblers who lost and now want a refund. After all, if you bought a house you can afford and got a fixed rate mortgage, how did the housing collapse or the subprime collapse effect you? As someone who bought a house about 15 months ago, I can tell you, it doesn't.
But if you took risks, if you took an ARM betting that rates would always drop and, if not, the continual rise would always let you jump out into a fixed rate, well you were trying to game the system
and lost, I have no more sympathy than I do for a blackjack card counter who forget their were three decks not two. Nor do I have much sympathy for those who took home equity loans based on paper appreciation in their house, planning to pay them off by financing again once the house had accumulated more equity due to the boom. They were not responsible borrowers taking loans they could afford, they were gamblers betting on a continuing rising market, and they lost.
Why should we reward gamblers? Can I present a bill to the government for those Ford call options I bought that are worth much less due to Obama's trashing of the stock market? Can lottery players redeem their losing tickets along with their winning ones?
If not, then it is unfair to single out irresponsible home buyers to indemnify against losses. Oh, some will point to Joe Blow from Kalamazoo who lost his job and is getting evicted, and, yes, there are a few sad tales, but there are a few sad tales in boom times too. The sad tales are not the run of the mill individual struck by this problem. Those losing money are either people who bought too much house, gambled on ARMs, extracted too much equity, house flippers who used creative short term financing and got caught out when the market tanked, and others who were effectively engaging in speculation on the rising home market and absurdly low interest rates (which, sadly, the government is trying to force even lower).
And that is the bigger problem. Unfair laws can still be effective, so arguing a lack of equity, while emotionally appealing, is not as valid as showing real damage, and real damage this proposal has in abundance.
First, since the government has not cured the underlying problem, and is in fact exacerbating it by forcing interest rates lower
and proposing tax breaks
for home buying, in effect trying to resurrect the insane housing boom, as the problem has not been fixed, there are new loans coming all the time. If these borrowers know the government will bail them out, what incentive dot hey have to exercise any caution at all? Why not buy too much house? Why not gamble on an ARM? After all Uncle Sam will keep it form doing any harm.
Nor is that the only sort of irresponsibility these laws will cause. As I mentioned earlier
, one proposal is to cap payments on non-performing loans at X% of income. So, if X% of your income is less than your mortgage payment, what interest do you have in making payments? Why not default in order to reduce your payments? And it gets even worse if the government does anything to prevent foreclosures. After all, the threat of foreclosure is the only threat against subprime borrowers. They are subprime precisely because they have bad credit, so reporting them to the credit bureaus is no threat. Taking away their house is the only punishment which works. If the feds take that away, why will they pay anything at all? I know if I knew no one would foreclose I would be tempted to stop paying my mortgage, and there are many people in the world far less scrupulous than I am.
So, despite all the justifications, and all the sob stories, used to support it, the idea of providing any borrower "protection" is simply a bad idea all around. It is both unfair to those who were responsible and damaging tot he economy as a whole. Except for being able to feel good about themselves, and buy more votes with our dollars, I cannot see why any politicians would think it was a good idea.
Actually, there is an even worse effect, though it is simply adding to a problem we already have. People do not understand risk, and it is mostly because of our government
. Whenever a financial "crisis" strikes, that is when enough people guess wrong and lose money, the government comes in to indemnify them. And thus people do not understand the relationship between return and risk. They think they can chase after the highest return without having to face risk. It was this government created mindset which allowed Madoff to dupe so many. You will note, most of the professionals who do understand risk avoided him like the plague
, but his other victims, raised to think they would never face a real risk, had no second thoughts about his absurdly high and consistent returns. Everything in our government, from the FDIC to government flood insurance
, tells individuals that they need never consider risk, Uncle Sam will take the bullet for them.
That is a terribly dangerous message to send.