Poll: Do Mortgage Bailouts Encourage Irresponsibility and Punish Prudent Borrowers?

Ever since the announcements began coming out that there were going to be some bailouts to help the mortgage “crisis”, I’ve been a bit ticked off, and according to a recent Yahoo! Finance article, I’m not alone.

An Absurd Example

The article talks about one common example that I find absurd:

For example, one subprime borrower had a riskier hybrid adjustable rate mortgage (ARM) with a rate of just under 7 percent that was going to reset in December to 10.5 percent. But last month, as part of a new bailout plan from Countrywide Financial, the lender gave him a rate reduction to 5 percent on his loan, saving him hundreds of dollars a month.

Now wait a minute, 5 percent? That is lower than what most people even with good credit can get on a 15-year fixed mortgage right now! How on earth do you somehow find yourself getting out of a 7% to 10.5% ARM and getting refinanced into something lower than what someone with good credit can even get? I could see if the refinancing put the new rate in the ballpark of current rates of 5.5%-6.5%, but to be significantly lower?

Countrywide said it will refinance or restructure loans or reduce interest for hybrid ARM borrowers whose rates are scheduled to reset. And no one will have to pony up prepayment penalties for retiring loans early…The company will administer the program with non-profit community advocate, the Neighborhood Assistance Corporation of America (NACA). Some troubled borrowers will escape with refinanced loans as low as 5.25 percent.

Is This Alternative Better Than the Greater Sin?

According to Countrywide’s CEO of loan administration, this is a better alternative of the greater sin of letting the homes go into foreclosure. He argues that a vacant home in the community would just drive down property values for everyone. I can see that, and it is a reasonable justification, but is handing out money to the irresponsible really a better alternative?

All this is doing is encouraging someone to remain in a house that is more than they can afford, even with the slashed rates. If someone is in a position to require the bailout, they have clearly bit off more than they can chew. While their mortgage payment may have gone down, they still have an expensive house that requires property taxes, maintenance, higher utility bills, and so on. This is sending the wrong message to borrowers.

Taxpayers May End Up Funding The Bailouts

If you are a responsible borrower that makes your payments on time and took out a reasonable mortgage, how would you feel if your tax dollars were going to people who are getting their interest rates cut to lower than what you’re paying just because they bought more house than they could afford? As more and more money is required to fund these bailout plans, it will start coming right out of your pocket.

Rewarding Irresponsibility

If people who get in over their head find the government or their lender coming to their rescue to make everything better, what kind of message are we sending? If there is no negative consequence for their actions, there is no incentive to act any differently in the future. This just further promotes the hand-holding that goes on in this country where someone will be there to help you when you mess up.

If someone with a ridiculous mortgage can refinance without fees and get a rate around 5%, why can’t I be able to do the same and refinance to around 4%? What is the reward for acting responsibly? There isn’t one, unless you just want to pat yourself on the back for making a sound decision.

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Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

28 comments
Sara
Sara

In addition to being unfair and rewarding irresponsibility, this "bailing out" of homeowners keeps responsible average-joe type people from benefiting and getting ahead by blocking access to bargain priced properties. It effectively blocks free market and capitalism, monopolizing for the benefit of the banks and the wealthy. In other words, it prevents natural market corrections to occur, which would normally allow responsible people opportunities to get ahead and for the market to heal itself. Instead, wealthy investors and bank cronies get to swoop in and snap up the limited foreclosures that are allowed to hit the market before the average person even has a chance in most cases. Everyone knows that the banks have been holding foreclosures back and letting them out more slowly, so as not to "collapse" the market. But all they are really doing is bleeding wealth and opportunity that would have otherwise existed for the responsible and prudent and transferring it to the wealthy elite, the 1%, all while fostering a welfare state mentality and sense of entitlement. The hand of the government (which is controlled by the banking/corporate/ultra wealthy elite) now completely controls every aspect of the economy like a puppetmaster, organizing everything for the benefit of the elite, rapidly transferring wealth away from everyone else and fostering dependency and apathy in the populace. They are not allowing the natural corrections that should occur in free markets, and we have a one-sided market now that benefits only the elite. To gain support for their takeover, they use welfare and promote poverty. I saw a statistic recently that nearly half of the citizens in the U.S. take some form of welfare from the government. The more this continues, the middle class just disappears and soon we are left with 2 classes of people- the 99% slaves and the 1% elite controllers. Wake up people!

tyler
tyler

I can't believe all the haters out there. At some point in my career as a commissioned sales rep I could have afforded my modest home. Maybe some of you were fortunate not to lose your job and have had to settle for half your salary just to get by every month. There are a lot of us suffering from job loss, etc...which have caused us to spiral into this horrific situation.For some of us things have gotten so bad that it would be difficult to qualify to rent at this point. What do you mean you have not been rewarded for paying your bills on time? You've had the opportunity to pay lower interest rates for years on end. Spread the wealth.

bank robbery is illegal
bank robbery is illegal

The Mortgage Forgiveness Debt Relief Act of 2007 removed the last incentive for borrowers to remain in “their” homes. This law must be rewritten and retitled the Patriotic Mortgage Repayment Act of 2008.

The Patriotic Mortgage Repayment Act of 2008 - If a borrower defaults on a mortgage and the market value of the collateral is insufficient to repay the money borrowed, the Treasury will recover 105% of the residual borrowed but unpaid amount using IRS collection methods and interest schedules. Such a law would prevent the general population from bailing out the speculators that purchased more house than they could reasonably afford. These wannabee flippers took grandma’s money out of the bank, now the bank has collapsed the the FDIC is having to pay off grandmas. The least these deadbeats should do is repay 100% of grandmas’ money to the treasury plus 5% as a handling fee.

It should be trivial for the borrower to meet his obligation. After the foreclosure sale recovers 60% of the original loan, the payments on the remaining 40% loss should be well within the budget of even the biggest speculative wannabe flipper real estate genius that bought at the top of the market using grandma’s money.

annon
annon

They are determined to "help people stay in their homes" I guess this means foreclosure forbearance and loan modification. Obviously this is not fair at all and can drive a prudent person nuts. My money is on the prudent person slowing slipping into imprudent ways. The prudent people still paying their loans which were obtained in the last 5 years in addition to putting 5 to 20 percent down and yet still underwater what will they do?

I think these people should stop paying their mortgages and qualify for the forbearance because they will be able to squeeze a good year of living for free in the house. The downside is simply a 3 year credit hit but who cares. Right?

Iwanna
Iwanna

Why should taxpayers end up paying for the mistakes of careless and irresponsible people? Why should we allow people to be careless with other people's money?

Jake
Jake

TO: Ben Riggs
"I bet that everyone here who is saying that the bail-out is irresponsible bought their homes BEFORE the boom and took advantage of lower prices...."
Not necessarily, it could be also people who had enough sense not to pay $800K for an overpriced two bedroom condo in San Jose and rent it instead for $1800 a month...
If you are a professional, you should have been at least able to do a simple calculation or find a simple Rent vs Buy calculator online.

"...We didn’t create this mess. Speculators, flippers and the like created it."
I am sorry to point it out to you, but you did participate to create this mess. You could just say no and rent for a couple of years. It's buyers like you who created this boom, speculators could not function without people ready to pay any prices they asked for overpriced property.

Jake
Jake

Paulson, Bernanke & Co. should just let the market work to clean up this mess and to scare irresponsible borrowers and lenders for generations to come. The less the government does, the better.

Is putting 20% down payment and paying 6.5-7.5% interest on a 30 year mortgage considered to be constrained credit? If it does, I must agree with Phil Gramm - we are a nation of whiners. I still get 3-4 credit card offers a week and a friend of mine just got a 30 year fixed mortgage with interest rate around 6%.

Do they think that Weimar Republic style economy is better then Great Depression?

What is this obsession with Great Depression?
During Great Depression many countries had it much worse then United States when their economies were run by “go-getters” like Paulson and “esteem scientist” like Bernanke who knew better then the market. And the more government intervention there was the worse the countries fared.
Maybe our "esteem scientist" should also study a history of such a wonderful institution as Soviet GOSPLAN and learn how "well" government can regulate ones economy.

If Paulson is concerned that sound businesses and high quality borrowers will be denied credit, he should ask Congress to create a facility that helps to provide credit to the affected borrowers which will not be a total loss to the taxpayers unlike his decision to bail out his buddies.
Instead he decided to squander taxpayers money on the toxic garbage, no one in the world wants to buy at current prices, encouraging and rewarding the behavior which got us into this mess in the first place. What a bunch of lies, I feel like I am back in the USSR. Just wondering if it’s going to take 75 years this time and if the slogan is going to be ‘Mortgage non-payers of the world - unite!’ ?

Ben Riggs
Ben Riggs

I bet that everyone here who is saying that the bail-out is irresponsible bought their homes BEFORE the boom and took advantage of lower prices. When my wife and I (both professionals in Northern California with almost zero debt) wanted to buy a home, the prices had been driven so high that we had NO choice but to take out a 5 year, I/O ARM converting to a 25 year adjustable. If our condo cost what it was actually worth we could have easily qualified for a 30 year fixed. We are not rich, nor do we have rich families to help us out. We are like most people in this mess, we wanted to own a home for the security it provides yet the "boom" made even modest home out of reach. What did you all expect us and others like us to do? Pass on owning a home and watch all you "lucky" folk who bought in when the market was down? So, we should have been renter s all of our lives? We didn't create this mess. Speculators, flippers and the like created it.

David Messmore
David Messmore

I would be interested in the demographics of this mess. Who are the borrowers that took loans they knew were above their means? They should be held accountable for their bad decisions. I'm only 44 but I am just old enough to have been brought up with the idea that I had to save for a few years to get the home I wanted. Nowadays it seems that instant gratification is the order of the day and big business is greedy enough to take the risk by handing out loans to people who don't quite qualify. My guess is most who were "suckered" are the twenty somethings and gen xrs who were born and bred on the notion of instant gratification. Am I right? Of course it doesn't end with just the mortgage. Let's not forget about the behemoth Yukon Denali at 10 mpg that most of them have to have to go in their new 4-car garage. The bottom line is, without getting people to be fiscally responsible, they will just move on to the next exploitable market to get their fix. One of which is credit cards. YOu know where I'm going with this. Bye!

Jeremie B
Jeremie B

It's a big time bail out. I know there are certain circumstances that it would be a good idea, but allowing the government to bail out the mortgage industry just throws more government involvement in our lives. The companies that were involved in the sub prime mortgage mess are currently getting killed in the market and rightfully so.

escapee
escapee

We need to let the market do the work here and NOT bail out either the borrowers or the mortgage companies. To do so only encourages more risky behavior and bad decisions.

Do you really feel like you should be paying for this guy's house and his other bad decisions? Or the fools who loaned him the money?

http://www.nytimes.com/2007/11/09/us/09speculate.html

Jeremy
Jeremy

Shadox, while that is technically correct, it is still bailing out the borrower. Whether the lender is directly financing the help with renegotiated terms, or the government is infusing money to the lenders, either way, somebody is getting "bailed out".

If Countrywide is changing terms for the borrowers, whether they lose money on the deal or not, people are virtually getting a free ride out of their mistake.

While I think using taxpayer money to bail these people out is extremely bad, so is the fact that people who made poor decisions can get a get out of jail free card (paid for by the lender or not) while people who play by the rules and make wise decisions get screwed.

Nivek
Nivek

Is this a bailout of the irresponsible homeowners or is it a bailout of the mortgage industry? I say let the CEO of Countrywide bailout the homeowners. He made $43 million last year, he can afford to help bailout the loans his company never should have made.

Shadox
Shadox

I am very much against bailouts and have written a detailed post on the subject. HOWEVER, the case you describe with Countrywide is NOT a bailout. It is an agreement to change commercial terms between a lender and a borrower, and I have absolutely no problem with this. The only one suffering the consequences is the lender who made a bad deal. Sucks to be them.

What I do object to is a government financed bail-out, which is the equivilent of saying that I personally, through my tax dollars, have to pay for someone else's idiocy.

Eric
Eric

I do agree bailouts are a bad idea and shouldn't happen unless it is decided by the business. It might be cheaper for them to offer lower rates than foreclose. Regardless they are getting hammered in the market.

But there are plenty of benefits of being responsible - mental peace, maintaining independence, self-respect. These are worth a lot more than a few percent in interest.

BeyondtheConsumer
BeyondtheConsumer

Wait...so if I stop paying my bill they will lower my rate? Neato!

Patrick
Patrick

I am not a fan of actions like this. I think it promotes irresponsible actions on all sides of the matter - the borrowers borrowed more than they should have and under horrible terms (bad), the lenders gave away money in the form of horrible loans that they packaged and sold as soon as the ink was dry (bad), and the government is giving tax dollars to "fix" the situation (bad), which is the equivalent of your father saying, "Now Timmy, you shouldn't have stolen your brothers toys and sold them to the neighbor next door, but since your brother beat you up, I'll buy you both an ice cream." (Or, the shorter version - 2 wrongs don't make a right, and definitely do not warrant reward).

Anitra
Anitra

I voted "where's my bailout?" but I do think there is a certain amount of bailing-out that is OK.

Bail-outs only really make sense when they are a win-win for both the lender and the borrower - if the borrower can make payments at a lower level, and if foreclosing won't net the lender enough to cover the loan amount. The lender earns less money on the loan, rather than losing money on foreclosure.

Under NO circumstances should bail-outs be funded with taxpayer money. If it doesn't make financial sense for a bank to lower the rate for a risky customer, Uncle Sam shouldn't force them to do so by picking up the bill.

MoneyNing
MoneyNing

It definitely encourages irresponsibility but I don't think the US has a choice since no one wants a recession.

Our social security system is exactly the same. Everyone spends money irresponsibility and don't save so the government has to take care of them.

Meg
Meg

The bailout is a terrible idea. Not only does it encourage irresponsibility to borrowers AND lenders, the so-called justification is unjustifiable.

The reason for the bailout is to keep housing prices high? They need to come down! It's called a market economy--we need to let the people fail who can't afford their homes and let the lenders lose money who made terrible loans.

Let prices fall! They're being held artificially high by the bail-outs. What about all the prudent people who can't even get into the housing market now because all the irresponsible borrowers ran up housing prices with awful loans from irresponsible lenders?

Lenders should be allowed to lose money, and borrowers should be allowed to default. It won't ruin the economy--it'll make it stronger. It's not like there are THAT many lenders--the job losses if they close won't cause the economy to fail. And these irresponsible borrowers aren't spending THAT much as consumers anyway (it's all going to the mtg pmt!). If a few of them go bankrupt it's not going to hurt the overall economy. Please.

Webomatica
Webomatica

The only time the mortgage holder should get bailed out is in the case of out and out fraud. Otherwise - I think the culture of borrow, borrow, borrow is not a sustainable trend.

The price for borrowing money is interest paid to the lender. You can't pay it back, you should get a higher interest rate. That's the deal. As for houses being foreclosed on and the price going lower? That's the free market at work. I say bring on the lower prices, and let the people who have a more realistic ability to pay back the loan own the house.

What exactly do the lenders want? Borrowers who can actually pay back the loan or not?

INHABIT AUSTIN
INHABIT AUSTIN

Loosening the belt never seems to help anyone defeat their problem with over-eating... does the same apply to personal finances?

I'm not surprised by the bailout announcement. It reminds me of how banks and credit card companies always seem to increase your credit amount available to you once you start to approach the credit limit.

Matt Wolfe
Matt Wolfe

I don't like this at all. The people who take the irresponsible route and purchase a home with a risky mortgage are getting a better deal as interest rates rise than the people who took the responsible route and locked in a good fixed mortgage. It's not fair of the lenders to do this. Just my opinion.

HFWealth
HFWealth

On the face of it, as a solution to a potentially huge problem, this may appear to be good business on the part of the lenders.

The problem, as others have commented, is that how is this kind of situation sustainable? The lenders are saving short term pain for long term problems. Nobody wants to see people being foreclosed on but being bailed out by people who were prudent on their borrowing is a bit rich and, will inevitably come back to bite the lenders.

Jeremy
Jeremy

Matt, that is what bothers me the most. Money has to come from somewhere, it doesn't just magically appear (although it seems like that is the case). But the last I knew, our country had a staggering deficit. Not only that, look at the value of the U.S. dollar as it is, can we really afford to just pump money into a problem? Then, when it does start coming out of taxpayer pockets, you're hurting the average joe just to help a few. That is a slippery slope I don't think we should be playing on.

And Zook, I agree. Now granted, there are some cases where possibly lenders worked illegally, and some people really did get screwed on their loan. I can empathize with that, but that is what the LEAGAL system is for. If a company broke the law to sucker people out of money, we have a system in place to bring those to justice and help those affected.

Like you said, with high risk, people are going to be charged more. That is the way it works. If the bank wants to risk their money lending to someone with poor credit, they can, but why are they surprised now that people can't repay them?

I mean, I've made some poor investment decisions in my day, I took on risk. When I lost money on that investment, I didn't go crying for someone to bail me out because I invested in a risky company and lost money. That is how it is supposed to work. But by just throwing money at companies who took on risk and lost, you're disrupting the very fabric of the free market.

Zook
Zook

For some reason we keep rewarding bad behavior. There needs to be a set of norms we all buy into. You take on a risky loan in a home you can't afford, you should, simply put, fail and lose your home. As harsh as that sounds, it has to be done.

There has to be some consequences when you take risk. This isn't the third grade....or is it? Everyone get 14th place ribbons, we reward illegal immagrants with benefits and on and on and on. I know I am generalizing a bit here, but there seems to be a trend towards being NOT responsible for your actions.

Matt
Matt

I voted other. I don't really know how effective mortgage bailouts will be. They could alleviate the problem, they could set us up for bigger problems down the road. The thing that concerns me most, is where does the money come from? In all likelihood either from tax payers or from banks.

If from the tax payers, is this really the best way to be spending our tax dollars? Would this money be better spent if put towards health care or infrastructure? Heck, if we're set on subsidizing more loans, wouldn't student loans be a better choice? I don't know the answer, but it's a question that needs to be asked, and it get the feeling that it's not.

If from banks, how does this affect that industry? There's a reason banks charge high interest rates, it's because of high risk. If we force banks to give people low rates on high risk loans, what does that do to the whole system? Again, I don't know the answer, but I'd guess it means a lot of banks will just give fewer loans in total because they're less profitable. That means that you're likely cutting out good loans with the bad ones.

This whole bailout business reeks of political maneuvering with little thought put into what the actual effects and alternatives are.

Sara
Sara

@tyler I should not have to "spread the wealth", my hard earned wealth, to you. Sorry, but it sounds like you bought a more expensive home then you should have- being in commissioned sales, you should have realized that any downturn in business could affect your income, and purchased a home that you could afford in the worst case scenario instead of going based off your very best months/year. It's called planning ahead and being prudent. I am sorry this happened to you, but it's not my fault, and I should not be forced to "spread the wealth" to you, sorry.