The Housing Chronicles Blog: Bailing out the undeserving sometimes necessary

Monday, April 7, 2008

Bailing out the undeserving sometimes necessary

There's an excellent article by Peter Gosselin in today's L.A. Times on the question of a mortgage bailout that would likely aid the undeserving. I've been predicting a federal bailout since the beginning of the year because although it may not be the economically 'fair' thing to do, the reality of politics tell a much different story (call me a cynic if you must).

In fact, the U.S. has a long history of bailing out a few of the guilty when the costs of doing nothing punishes everyone, and this is something which many armchair bloggers and commentors have yet to appreciate. Stomping one's feet and yelling, "No Bailout!" simply isn't going to work unless it's accompanied by a rational discourse on the harm that would be caused (i.e., artifically high housing prices, higher borrowing costs in the future, etc.). Is it 'unfair' to those who didn't participate in the greed that led to the mess? Absolutely. But whoever said life was fair? Just look to history (from the article):

The House and Senate are beginning to consider proposals for federal intervention on a massive scale. In effect, the government would take over many of the risks now borne by lenders, borrowers and investors -- offering to revamp and then guarantee about 1 million troubled mortgages in an effort to shore up plunging home prices.

The change would come in two stages. The first would be the likely passage Tuesday of a modest bipartisan housing aid package in the Senate.

Next would come action over a period of months on measures to guarantee $300 billion or more in revamped mortgages...

The proposals also are likely to raise the ire of mortgage industry lobbyists and investors in mortgage-backed securities, who want any effort to ease the crisis to be voluntary and small scale.

Nevertheless, calls for passage of one of the measures or something similarly sweeping are growing increasingly insistent as lawmakers and many economists conclude that something must be done to end the real estate price plunge quickly if the economy is to right itself.

And, contrary to what many Americans may think, government action on such a dramatic scale would not be new or even all that unusual. Washington has taken similar-size steps during economic crises of the past.

Repeatedly in the nation's history, from the savings and loan scandal of the 1980s to the Depression of the 1930s and the financial panics of the 18th and 19th centuries, Washington has stepped in when large numbers of ordinary citizens were threatened with financial devastation...

In almost every instance, action came only after long, agonized debate, particularly over the question of whether the beneficiaries of government action were in trouble through no fault of their own.

And in almost every instance, a simple calculation tipped the balance in favor of action: Although some who were undeserving might end up being helped along the way, the benefit to society as a whole was simply too substantial to ignore...

The S&L industry had gone on a lending rampage, but most of its bets had gone bad. The government seized the assets of 1,000 S&Ls, sold off half a trillion dollars' worth of property and spent $124 billion of taxpayer money paying deposit insurance to the institutions' customers, as well as aiding those few institutions that were considered salvageable.

Many depositors were ordinary people whose life savings were threatened. But others were speculators who simply made bad investment decisions -- often with the assistance of S&L executives.

The government set aside the question of who was deserving of aid, deciding that leaving it to market forces to work through the problem would have hurt many innocent savers and been a long-term drag on the economy...

During the late 18th and 19th centuries, Congress passed four major bankruptcy laws in the wake of financial panics. In each case, the measure released debtors -- deserving or otherwise -- from some of their obligations so they could get back on their feet and become productive members of society again.

In the 1790s, the newly formed federal government finally decided to pay off most of the debts accumulated by the states during the Revolutionary War, despite complaints that speculators in war bonds would benefit.

Distasteful as many found it, paying off the debts was deemed crucial to establishing the new government's credit at home and abroad.

A similar decision-making process appears to be underway in the current housing crisis...

Across the political spectrum, the consensus is that Washington has done little to help ordinary Americans affected by the entwined housing and financial crises...But pressured by the Fed's aid to financial players, the demands of economically strapped voters and the sense that key lawmakers may have come up with a way to parry the deserving/undeserving distinction, Congress is about to take up proposals that could greatly expand the scope of federal action...

Under similar proposals by Frank and Dodd, Washington would empower another New Deal-era agency, the Federal Housing Administration, to run a new mortgage guarantee program. Dodd is chairman of the Senate Banking Committee.

To participate, the lender would have to cut the principal of a troubled mortgage to 85% of a home's current, diminished market value. The FHA would take 5% of the new, lower amount as a fee. Homeowners would get the remaining 10% as equity to give them a stake in paying off the renegotiated mortgage.

Borrowers would have to prove that they had the financial wherewithal to keep up with the now-lower monthly mortgage payments. Those who couldn't prove they could pay would be ineligible for the program. If borrowers failed to pay the new, smaller mortgage, Washington would do so.

There were hints last week that by making the proposed program voluntary, having the government guarantee but not actually buy up houses or mortgages, and by slapping requirements on both lenders and borrowers, the proposal could fly politically.

1 comment:

peteberwick said...

I say screw all you yuppie pigs who bought your big yuppie home that you couldn't afford and now myself and my wife and kid, who have lived within our means and done without have to pay taxes to bail you out?? Disgusting. What we have here is the ugly stupid American in a nutshell. Little children in grownup bodies who diden't save a dime but instead bought homes bigge than they needed,drive $65,000 SUV'S and give their spoiled little brats everything they want.
Makes me sick..I say lose your damn house and learn a lesson. That's life, it's all about failing and learning from it.