I’ve written in the past that a number of economists believe that the economic recovery isn’t really going to kick into gear, and you won’t recover the money your portfolio lost in the meltdown of 2008, unless we find the bottom of the residential real estate market. There are a couple of schools of thought here. The first is that the Obama Administration needs to take further action to stem the continual wave of home foreclosures. Efforts to date have concentrated on lowering interest rates through the Home Affordable Modification Program, but that program has not slowed the crisis. With a goal of helping up to 4 million homeowners avoid foreclosure, fewer than 200,000 home loans took advantage of the Obama plan. To help improve these dismal numbers, Obama has now added incentives for lenders to reduce the principal of loans for homeowners with loan-to-value ratios above 115% and unemployed homeowners will get up to 6 months of mortgage assistance. Much of this program will be paid by “government funds” which of course means the taxpayer.
On the other side of the coin are those who feel that the government should butt out of the free market system and let the banks foreclose on those consumers who took “excessive risk” with their homes.
As we keep filtering through the never ending layers of political hot air, the key question of who has the responsibility of “due diligence” for this mess is starting to emerge. When we get down to the hard pan, we need to ask if the consumer should be held responsible for actions they willingly took or should they get some sort of government assistance both to help the individual and get us all back on track.
Homebuyers should take their lumps
Although the financial industry is full of disclosures to the individual investor, at the bottom of the pile it is up to the individual to decide whether an investment is appropriate or not. During the recent housing boom many investors were only able to buy homes that would otherwise be out of their reach by using non-traditional mortgages that often depended on the continual appreciation of the property. When values declined and “teaser” mortgages were reset to higher rates, there was often no other choice but foreclosure. Although this wasn’t the outcome the homeowners had hoped for, it was nevertheless a possible outcome that was part of the picture when the loan was initially taken out.
There’s a lot of history of the individual investor either taking gains or suffering losses due to their individual decisions. You could argue that the popularity and growth of 401(k) plans with both employers and employees was at least partially due to the desire of transferring investment decisions from plan administrators to the actual participant. 401(k) investments were hit hard in 2008, but have you heard anything about a 401(k) bailout? Do you really believe that Tiger Woods drives a Buick?
At the heart of this argument is that although Americans have basic rights, they don’t include living in housing they can’t afford. This might seem harsh, but the bottom line is that housing is not yet another government “entitlement” program.
Homeowners need to be rescued
The Federal Government bailed out banks, insurance companies and the auto industry. Isn’t it fair they bail out the consumer who in the words of President Obama, “played by the rules and acted responsibly.” Besides, as the proponents say, by helping homeowners who are either “underwater” with their mortgages or face foreclosure, we are really helping all consumers by bringing a quicker end to the crisis and strengthening the economy.
There may also be some feeling of government “guilt” in play as quasi-government agencies like FNMA and Freddie Mac helped cause the housing crisis by setting the standards for easy mortgage money.
As a country, we have stepped in and helped those who are going through difficult times many times. Social Security and Medicare are long term examples, and the cost of these programs is a thousand fold greater that any mortgage bailout program would be.
Sure the government is using taxpayer money, but they’ve never been in the business of bake sales.
Whatever the course of action, finding the bottom of the housing crisis is crucial for a continued economic recovery. For the moment, Obama has committed to a bailout program. Whether right or wrong, it’s time Washington got behind some program to help the recovery stay on track. Political gridlock will only delay the situation. Maybe that’s hoping for too much. After all, do you really really think that Tiger drives a Buick?
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