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If a vote were held Thursday or Friday, the U.S. Treasury's $700 billion bailout bill would probably pass both chambers of the U.S. Congress, but by narrow margins and with a) an equity stake for U.S. taxpayers for every company that receives assistance, b) a cap on executive compensation, and c) oversight provisions. Once the bailout work is done, should the U.S. Congress also pass a homeowners assistance bill to help more homeowners with at-risk / burdensome mortgages refinance to secure a lower interest rate?
As BloggingStocks' Jon Berr pointed out Monday, while lawmakers (and no doubt taxpayers) do not want to reward housing speculators, there's a large pool of borrowers who will be able to pay their mortgages if they can get out of high interest rate notes, and other burdensome adjustable rate mortgages, and refinance at a low, 30-year fixed rate.
While it's true the U.S. Government and taxpayers would end up subsidizing refinanced mortgages if the government receives interest that's less than it could by investing the money elsewhere, the costs of foreclosure - leading to bond defaults - leading to banking institution stress / systemic stress will undoubtedly be far greater, so says economist David H. Wang.
The counter view argues that those citizens who took out a high-interest mortgage and are in danger of foreclosure should be allowed to fail, and that the free market and capitalism requires it. Under the free market, winners are rewarded and losers are punished -- a mechanism that reinforces individual financial discipline and encourages citizens to make wise and correct choices. It also leads to a fitter and stronger society, market absolutists argue, and weeds out the less fit. Quite literally, it's economic and social Darwinism, a survival-of-the-fittest contest that leads to a stronger society.
The problem with the above argument, Wang says, is that survival-of-the-fittest does not apply universally, certainly not to banks and large institutions.
"Survival-of-the-fittest stopped about $85 billion ago with the loan to American International Group. Or was that $200 billion ago with the takeover of Fannie Mae and Freddie Mac? Or was that $700 billion ago with the proposed U.S. Government purchase of mortgage backed securities and related distressed assets?" Wang said. "If we're not going to apply the rule uniformly then perhaps it's better to follow a different philosophy, like stopping the bad debt problem at the source, by helping more homeowners remain in their homes by refinancing their mortgages."
Wang said increased funds for the Federal Housing Administration to refinance mortgages, something House Financial Services Committee Chairman U.S. Rep. Barney Frank, D-Massachusetts, favors, would "help end the rise in home foreclosures, reduce the supply of homes coming to market, thereby helping the housing sector achieve a bottom, which will speed the rebound in prices."
Housing Sector / Economic Analysis: Keeping more homeowners in their homes would not only be a step in the right direction concerning home prices, it would also stimulate the U.S. economy. That's because citizens who own homes don't just live in them; they buy furniture, appliances and undertake maintenance -- all spin-off sectors that would also benefit from fewer foreclosures. Hence, in the final analysis, the view from here argues that the benefits of home ownership expansion far outweigh its costs.
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Reader Comments (Page 1 of 1)
9-24-2008 @ 7:32PM
dave said...
As long as low interest loans are made available to all qualified applicants, great.
But, to limit availability to those in or near foreclosure would be a mistake.
Those of us who have never missed a payment and are even a few months ahead in principle payments deserve the chance to better our loan deal. This is not welfare , it requires on time payment in full.
9-24-2008 @ 7:41PM
Brett King said...
It must be obvious, there can be no free market in finance. We need to go back to NEW DEAL banking. Housing prices will not "stabilize" until they go back to where they were when this easy money started. In my area it needs to drop another 30% to 50%, before the average working couple can afford a house.
9-24-2008 @ 8:12PM
Sue said...
We, the people who have always paid on time, never bought what we could not afford, should not be expected to pick up those who have skimmed along buying what they could not afford. Let them sink to the bottom and build themselves up by themselves.
9-24-2008 @ 8:37PM
JohnF said...
Why not? Our government has funded everything else,including the reconstruction of Iraq. Why not America? Our current crisis has been the result of years of mal and non-feasance by the SEC and other government agencies. The SEC has just announced a crackdown on naked shorts that has always been illegal. What took them so long? And Wall Street has been allowed to buy themselves out of gross Ponzi schemes
for decades (Read Serpent on the Rock by Kurt Eichenwald). I was there.So why not help those who have been paying for all of this corruption and incompetence? Maybe those in power live by that old addage: never give the suckers an even break! Whatever, the blind leading the blind through the portals of greed and corruption that leads to the road to nowhere because you can't buy your way into heaven with worthless paper.Give it to the suckers. After all,all they really want is a place to live.
9-24-2008 @ 10:22PM
george bender said...
Living in Miami for many years I saw
loans given to everyone with a pulse-
Prices sky rocketed and are less than
half way back to pre-bubble - a bail out
makes it impossible for those who played by thre rules(saved a down payment,
payed their bills on time, ect) to afford a
modest home - it makes me sick
9-24-2008 @ 10:21PM
Rick said...
So the markets are not free after all? They are controlled by the big money and the government? Maybe that's why stocks are still way overpriced. Smoke and mirrors.
9-24-2008 @ 10:40PM
Joe said...
NO. Why should MY hard earned money go to these so called, "Intelligent" CEO's of these major corporations that are failing their stockholders and the consumers alike? When I make bad judgements, I am held accountable for my wrongful actions.... Why should Corporate America be treated differently?
9-25-2008 @ 3:12AM
Levi said...
President Bush, and congress are the biggest bunch of wusses I've ever seen.
And the American people are "whipped"
We need to take our medicine.
Why would I let my tax dollars help keep someone else in a better house than I have? A house that I might add I CAN afford.
9-25-2008 @ 6:00AM
NoInform8tion said...
Well if they wanted to prevent this huge Wallstreet meltdown, they should have started bailing out housing in 2006. Better yet should have stopped the bubble before it got so large. However, now it's too late for any bail outs to work. The amount they want to use wouldn't come close to solving Wallstreets deficits and you'd still have the problem that's triggering losses and that's housing and housing just can't recover fast it's too late for that. It took Japan 10 years to bring their housing back after their crash. I'm not even sure it came all the way back yet.
9-25-2008 @ 6:55AM
al coholic said...
A phrase I read keeps ringing in my ears....
"A Democracy is doomed from the moment the peole figure out that they can vote themselves all the money."
9-25-2008 @ 9:17AM
sarai said...
give me a brake it would be just like they do in school today win or lose they all get a prize. an lets all start takeing responceability for the choices we make and live with them.
9-25-2008 @ 9:29AM
Cathy said...
Read Brett King's comment below. This is exactly what needs to happen. We also have to make the attempt to have housing be affordable for the median income of one person. This will put families in a less-precarious situation when there is loss or illness. Right now families are stretched so thin with two people working to pay for one modest home. At least that's the way it on Long Island. A few months or, even less, off of work and the home is in danger of being lost. Of course, we're going to hear from the group that used their homes as ATMs crying foul over the "loss of value." The point is that the valuation of homes for the last 8-10 years has been suspect, to say the least.