As lawmakers in Washington begin to address the home mortgage foreclosure crisis, the writer of a letter to the editor of the Livingston Press and Argus complains that federal assistance in such a crisis amounts to helping people who made foolish decisions.
No prudent person would agree to a mortgage with an interest rate of 11 percent, he claims. Such people don't deserve help because they were not as frugal as he is, the writer insists.
So why should the nation help out people -- like many of those here in Michigan -- caught in this foreclosure crisis?
Republican senators apparently have decided they should help out average people because it's hard to justify not doing so after the Bush administration bailed out Bear Stearns.
Besides the sheer hypocrisy of helping rich corporations and not little people, there are other good reasons.
Despite the letter-writer's self-righteousness, a lot of people got into this mess through no fault of their own. Mortgage companies did not always fully disclose what would happen to adjustable rate mortgages in the future, for example.
Or people may have thought they could refinance their adjustable rate mortgages to something lower, as homeowners have been doing for years, only to find out that the mortgage crisis has made refinancing more difficult.
Or they may have lost their jobs, had unexpected medical bills not covered by insurance, or gotten a divorce. In such cases, hanging onto a house that is worth much less than what is owed on the mortgage is difficult when the payments become unmanageable.
Perhaps the homeowners should have foreseen that prices would drop. But when the real estate agent and lender are telling the buyer the deal is a good one, a less sophisticated buyer is likely to trust their judgment. After all, they're the experts, aren't they?
Furthermore, the home mortgage foreclosure crisis is not like a broken leg that affects only the person attached to the leg. It's more like a virulent virus that spreads easily on the wind, sickening those not even close to the carrier.
According to The New York Times:
"Roughly 4.2 million mortgages were either past due or in foreclosure at the end of last year, according to the Mortgage Bankers Association. An additional three million borrowers may default in the near future."
The ripple effects of a crisis that widespread can swamp a lot of other people who think they are secure.
The value of all homes in an area affected by the home mortage foreclosure crisis drops. Neighborhoods with many foreclosed homes begin to experience blight. People who are not facing foreclosure but need to sell their homes in order to move to another job have difficulty finding buyers with so many competing, cheaper properties on the market.
Builders pull back on constructing new homes, so employment in construction and related fields drops. People who are not buying new homes also are not buying new appliances, new carpeting, and new furniture, so spending in those areas is affected.
Those not selling their homes find their homes worth less so they are less able to borrow against them through home equity loans to make improvements or for other reasons. So spending on construction and materials drops even more.
In other words, a mortgage foreclosure crisis of this magnitude has the potential to drag the entire economy into a recession.
That's not good for anybody -- not even people who smugly congratulate themselves on not having had the bad luck to buy a house at the wrong time.
3 comments:
But what should be done for those who willfully chose to not buy a home during the price run-up? Should they pay the consequences through a real-estate bail-out funded by taxpayers? A bail-out by the government will encourage real-estate speculators and people with an inability to understand basic financial terms to repeat this whole fiasco again 10 years from now. Losses in real-estate should be no different from those in any other speculative venture (the stock market, a business endeavor, etc.) The solution is simple and time-tested: file for bankruptcy.
I have always thought, in some part its down to the homeowners. People always want bigger and better, In my personal opinion they should have compensated for a situation like the one we are currently seeing. Maybe Mortgage Bonds would help them, but then people don't like to spend more money!
The same is happening in the UK at the moment, people are finding it hard to pay their mortgages and thus going to load sharks for loans, which puts them in a worse situation. Maybe if more people had Mortgage Bonds it would help the situation?
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