Cathy Young writes (emphasis hers):
Lately, there has been a lot of discussion of the moral aspect of anti-crisis measures that, in effect, allow people to get away with bad or at least irresponsible behavior — specifically, bailing out homeowners who took out mortage loans they couldn’t realistically afford. […]
There is, however, an alternative to letting the foolish and reckless go under — taking a few of the wise and responsible down with them — or forcing other, more responsible people to pay for their folly.
Provide the assistance — but in the form of loans. Let the people, companies, and states on the receiving end of taxpayer-funded rescue repay the money later, when they’re back on their feet. At low interest. Or even zero interest. But there should be no such thing as a free bailout.
Looking specifically at the example of “homeowners who took out mortage loans they couldn’t realistically afford,” I think Cathy’s plan is far worse than Obama’s — because Cathy’s plan, not Obama’s, is the free bailout.
Obama’s plan (pdf link)…
is intended to reach millions of responsible homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly. Millions of hard-working families have seen their mortgage payments rise to 40 or even 50 percent of their monthly income – particularly those who received subprime and exotic loans with exploding terms and hidden fees. The Homeowner Stability Initiative helps those who commit to make reasonable monthly mortgage payments to stay in their homes – providing families with security and neighborhoods with stability.
So it lets people refinance their loans — but they don’t get a free lunch (or a free house). They’re required to continue making payments.
Meanwhile, the lenders are taking a loss compared to what they would get if mortgages were paid at the original terms — but that loss is mitigated by incentive payments from the Federal government. And it’s less of a loss for the banks than if the homeowners default on the mortgages.
Compare that to Cathy’s solution, in which, rather than helping the homeowners out with refinanced loans, the government lends homeowners money to cover the shortfall between what they can afford to pay, and what their mortgage terms call for. This would leave homeowners far worse off, but it would be a bonanza for lenders.
But that would be unfair. Let’s ignore, for a moment, the fact that many homeowners having trouble with their mortgages didn’t act irresponsibly. What about the case of someone who used a subprime loan to buy a house they couldn’t afford, once the adjustable interest rates went up? Sure, they acted irresponsibly — but so did the lender. In fact, I’d say the lender — who should have much more expertise than the borrower — was more irresponsible.
Cathy’s plan would be free money for irresponsible lenders. Obama’s plan — which rescues both lenders and borrowers from the worse consequences of irresponsible loans, but expects lenders to swallow some loss and borrowers to keep making monthly payments — is fairer.
* * *
The above is written under the assumption that under Obama’s program, lenders really do end up making less money than they were owed under the terms of the original mortgage agreements. (I think I read that somewhere, but I can’t find it now.) If I’m wrong about that — if the Federal government ends up paying lenders as much money as they “lose” by refinancing the loans — then Obama’s plan really is a free bailout for lenders.
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