Should the U.S. government bail out homeowners who obtained adjustable-rate mortgages and then were unable to afford the higher payments when the interest rates increased or the mortgages were recast?
The issue should be important not only to individual homeowners caught in that specific situation, but also to real estate brokers and agents; mortgage brokers, lenders and appraisers; builders and construction workers; unaffected homeowners and renters; seniors, corporate borrowers and consumers; and, indeed, just about anyone who owns or wants to buy a home, makes a living off real estate or has more than a nickel or two in personal assets.
For all those constituents, the answer is, not surprisingly, both yes and no. In short, the U.S. government should take action to help some homeowners, but only in certain narrow circumstances.
What’s been lost in the debate over government assistance is a very important distinction between homeowners who were victimized by disreputable lenders and mortgage brokers and homeowners who were simply foolish or reckless who now need to accept the consequences of their decisions.
First, the victims: Media outlets have already published a flurry of heartbreaking reports about very low-income homeowners whose incomes were mysteriously inflated on closing documents, who were pressured to refinance repeatedly until their equity was exhausted or who were misled by illegal or unethical lending practices that sometimes included outright lies and outrageous fibs.
These folks deserve our collective aid in the form of some limited government relief from their predicaments. They also deserve the satisfaction of seeing the perpetrators in prison and having tougher new laws enacted to protect others from being similarly defrauded in the future.
Second, the foolish: Many of the homeowners who face foreclosure today were not the victims of fraud. Rather, they acted out of their own ignorance or greed. They knowingly accepted the risks of exotic mortgages because they felt they had to live in that bigger house or that better school district. They took advantage of teaser rates to buy pricier homes with little thought as to how they’d handle higher payments in the future. They refinanced to buy luxury cars and vacations on the unsupported assumptions that extracted equity was free money and the housing boom would continue forever. They bought multiple homes as investments even though they lacked the financial acumen or wherewithal to handle that much risk. They didn’t bother to read the documents and disclosures they were given and they signed loan documents that wildly exaggerated their ability to repay the sums borrowed.
These folks deserve opportunities to resolve their present situations and learn from their mistakes. They deserve our collective sympathy and compassion, as none of us has lived a life free from error. But they should not be the recipients of government largess at the expense of other taxpayers.
A government hand-out for these homeowners would not only enable them to escape the consequences of their decisions, but also create a perverse reward for high-risk financial behavior and indirectly penalize those who declined to accept such risks. A bailout would trigger a justifiable backlash from homeowners who obtained fixed-rate mortgages and made higher payments month after month and renters who stayed out of the housing market because they couldn’t afford a fixed-rate mortgage and educated themselves about the true risks of adjustable-rate products.
The difficulty, of course, lies in trying to figure out who was truly defrauded and who was merely reckless. While that is a knot for lenders, regulators and judges to unravel, the obvious cases should be, well, obvious.
Marcie Geffner is a real estate reporter in Los Angeles.
Copyright 2007 Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
