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Rewarding Bad Behavior   February 19th, 2009
Homeowner bailout forces taxpayers to pay the mortgages of other people       


More observations...

President Obama unveiled his plan to try to avert foreclosures yesterday.

Part of me wanted to analyze the proposal and the possibility that it might work, but there's a simple fact: A homeowner bailout rewards bad behavior. Just as we were all rightly offended by the bailout of the financial sector and the auto industry, a bailout of people who can't afford their homes is equally offensive.

Regardless of whether it should or shouldn't be done, let me just briefly say that I don't think it'll have a significant impact on foreclosures. The plan seems complicated, filled with caveats, there's no clear indication to homeowners who exactly qualifies, and it seems the primary motivation for lenders to participate is really just the threat of a bankruptcy judge rewriting the mortgage later if the person goes bankrupt. So the lender can either maybe take a loss later or they can definitely take a loss now. Considering that the cash flow of banks is a pretty delicate thing right now, I wouldn't be surprised if many banks opt for "I'll gamble on later."

Update 6/22/2009: As I wrote above, four months ago, I didn't think the program would work. Now there is news that it would seem it hasn't worked.

The Mortgage Bankers Association on Monday slashed its estimate of the number of mortgages its members will issue in 2009. One reason: Few refinancings are being done under the Obama administration's ballyhooed Home Affordable Refinance Program...

Only 13,000 HARP refinancings have been completed during the first three months after the program's launch, according to the MBA. Policy makers originally projected that 4 to 5 million mortgage borrowers would take advantage of the program over the next year...

"My prediction is that the volume for this program will pick up," he said. He demurred, however, from forecasting that HARP volume will ever reach the 4 million to 5 million originally estimated.

That aside, it's yet another in a string of bailouts that we shouldn't engage in. It rewards bad behavior and forces the 92% (from a report today on MSNBC) of homeowners that are paying their mortgage on time to help pay the mortgages of others that aren't.

The argument in favor of the bailout is that if these people aren't helped, they will lose their homes and abandon them--and an abandoned home drags down the value of the houses of the neighbors. So doesn't it make sense for the government to help these people stay in their home to protect the value of everyone else's homes?

I don't think so.

This goes back to the fact that we're now continually trying to borrow and spend money to avoid pain. But there will be pain. And those of us that have conducted ourselves responsibly, bought houses that we can afford, and continue to stay current on our mortgages will suffer for the mistakes of others. But we can't and shouldn't compound one mistake (allowing ineligible buyers to borrow money for houses they couldn't afford) with a second mistake (having the government bail them out).

If someone is a few hundred dollars a month short and unable to make their mortgage payment, perhaps their friends and family can pitch in. If their neighbors are concerned about what a vacant, abandoned house will do to the value of the neighborhood, perhaps the neighbors along the street will all be willing to contribute $20 a month to avoid a foreclosure. And these same people might have a better idea of whether the situation is really fixable given some short-term help or whether it'd be a matter of throwing good money after bad. And maybe the at-risk homeowner will do a better job of fixing his financial house when his friends, family, and neighbors are right there watching. Constantly expecting results.

Anything the government can do to bail out homeowners can be better done by individuals that know the situation. And a homeowner should at least be willing to ask for help of the people that know him rather than taking the money from them--and from people they don't know--by way of the government.

The government needs to stop borrowing money on everyone's behalf to reward bad or unsustainable behavior. It needs to stop absolving personal responsibility. And it needs to stop trying to do those tasks that friends, family, neighbors, and charities should be doing. And could be doing much better.

We have to stop looking to the government for help. The government cannot save us. Only we can.

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