It seemed like a win-win issue: Politicians would rescue homeowners by swooping in and freezing all resetting mortgage rates. Homebuyers would be saved from possible foreclosure, and the politicians would win points (and votes) in the process.
Problem is, most people don't agree with the proposal. According to a poll from Public Opinion, 62% of all Americans oppose bailing out their neighbors from buying more house than they could afford. That's not because of some Darwinian hope that only the strongest will survive. It's just that we generally don't think our neighbors' mortgages are our problem. Certainly, our pocketbook shouldn't be pried into to save them, and unlike the politicians, we recognize the many problems that the rate freeze engenders.
- It's a moral hazard. We're saving people from making bad mistakes, so that next time around, they end up making the same ones all over again ...or worse.
- It's an economic hazard. It's not the government's job to prop up housing prices. Borrowers benefited from some ridiculous terms to buy houses that are simply not worth that much. Interference simply forestalls and extends the pain that must inevitably come.
- And it's a political hazard. While foreclosures caused by resetting rates are regrettable, Countrywide Financial
(NYSE:CFC)estimated that only 1.4% of its foreclosures were as a result of such resets. Far more people are facing foreclosure from illness, injury, job loss, and so on. Where does the queue begin to start bailing these people out next?
We lament our neighbors who may lose their homes because their mortgage rates are going to increase. Yet when housing prices were climbing at double-digit rates year after year, when the government was encouraging lenders to make more money available so that more people could participate in the American Dream, we heard no condemnation of adjustable-rate mortgages. Did we forget what the word "adjustable" meant?
If you drink too much, you pay afterwards with a hangover. And lenders such as Countrywide, Wachovia
Why, then, shouldn't the homebuyer -- who eagerly became a participant in the mortgage rave party -- suffer the financial effects?
It's folly to suggest that the 95% of homeowners who make on-time mortgage payments should need to bail out an irresponsible few who bought more than they could afford, lived larger than they should, and spent far beyond their means.
Politicians may think they're currying favor by "rescuing" borrowers, but the greater hazard may be the moral minefield they're creating.
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