Should the Government bail out people who may lose their homes to foreclosure?

[w¡n9Nµ7 §£@¥€r 123]

Troubles in the subprime mortgage industry seem to be spreading. The stock market is in turmoil. Alan Greenspan and other economists say the economy is being hurt. Consumer groups predict that up to two million Americans will lose their homes.

Should the government do something?

A growing list of people say it should, from Democratic senators Christopher Dodd and Hillary Clinton to a string of advocates for the poor. Perhaps the money-losing lenders should be bailed out. Or maybe there should be help for hedge funds and other investors who have loaded up on securities backed by subprime loans. And there could be help for homeowners who can't handle their soaring monthly payments.

Not so fast, say Wharton faculty who have studied the mortgage market and past government bailouts. "I think that for the moment, they should probably leave it alone," says Joseph Gyourko, professor of real estate and finance at Wharton, warning that bailouts can make people more reckless in the future. "We don't want to introduce moral hazard .... We don't understand this very well right now, so any regulation is probably going to be wrong or imprecise."

[...]

Ken Thomas, a lecturer on finance at Wharton, argues that people and institutions that make risky choices are usually best left to suffer the consequences. "When we had the last big financial meltdown with stocks in 2001, did we consider bailing out those who lost money in the dot-com crash?" he asks. "We try to have markets regulate, not the government. Markets do a much better job."

[...]

Dodd, chairman of the Senate Banking Committee, plans to introduce legislation to protect homeowners from foreclosure and to crack down on predatory lenders who pushed high-risk loans on unsuspecting borrowers. Clinton is pushing for a federally mandated "foreclosure timeout" that would give homeowners more time to catch up on their payments, and she wants to curtail the prepayment penalties that make it hard for troubled borrowers to refinance.

[...]

To many, the most analogous situation to the current one was the $125 billion government bailout during the savings-and-loan crisis of the late 1980s and early 1990s.

[...]

In that case, the government worried about the ripple effects on the economy and the millions of innocent depositors. Unlike the subprime borrowers, though, the S&L depositors had not chosen to make risky bets: They had merely put their money in the bank.

[...]

"You certainly do not want to bail out the lenders," Gyourko says, arguing that the marketplace will curb risky behavior on its own. "The markets are telling lenders, 'You know, if you issue loans like those again, it's going to be very, very costly.'"

[...]

The main lesson to be learned from the subprime crisis may be that borrowers need to know more about the risky products they are offered. "One of the things that's wrong here is the issue of full information," Summers says, adding that "every subprime lender should be required to have a statement of the particular terms that is unambiguous."

[...]

Most proposals for remedies have focused on borrowers. Dodd and some consumer groups believe many borrowers were lured into subprime mortgages by predatory lenders who concealed the risks, and experts say subprime lenders often paid mortgage brokers commissions two or three times those on prime loans. Consequently, Dodd says he will introduce measures to curb predatory lending. He has yet to offer details.

And so far it is not clear how many subprime borrowers can truly be described as victims. "I think we don't know anything, other than anecdotally, what's happening in this particular episode," Sinai says, adding that some borrowers are people who could not have bought homes had they not had access to subprime loans. If they lose their homes, they will simply return to the ranks of renters. "So how much worse off are they?" Sinai asks. "Probably not a lot."

[...]

Better risk disclosure would be good, Sinai says, but borrowers are always going to be subjected to salesmanship: "I really think there is no way around the fact that when there is a competitive lending frenzy, loans are going to get made that are riskier than they are portrayed to be."

http://knowledge.wharton.upenn.edu/article...TOKEN=25068241#

Edited March 23, 2007 by Gupt

[Trumplestiltskin 5,791]

I think that there ought to be some sort of shakeup of the lending industry industry in general so that people aren’t given access to massive lines of credit that they can’t reasonably afford to repay. That seems to be little more than an excuse to get people into huge debt. At the least lenders should clearly spell out the risks of variable rate mortgages, rather than hiding them amid an incomprehensible gobbledygook of legalese.

As to whether the government should step in – I suppose that depends on the scale of this problem, but suddenly having thousands of people being left destitute as a result of an interest is hardly desirable.

[ChristinaM 0]

There is a whole sector of the mortgage industry that's known by those in the business as "loan to own". Practices in the subprime industry are pretty shocking. Just reregulating usury would be a huge help - that was what allowed the mortgage industry to play fast and loose with peoples' lives.

I heard an interesting piece on NPR the other morning about whether WalMart should be allowed to enter the mortgage industry. The commentator was saying that it could be just what the subprime industry needs - more competition, better rates for all... He was saying that by allowing WalMart in, the increased competition would help to stablise the market. I think he had a point.

I don't think the government should be bailing people out; yes, it sucks if your home is about to be foreclosed on. But you must have had some idea what you could reasonably afford to pay when you took that mortgage on, and if you overstretched yourself, I am not willing as a taxpayer to subsidise your bad decision. Would we allow the government to bail out people who overstretch themselves with credit card debt, when they know perfectly well what their monthly incoming and outgoings are? I think not.

The "American Dream" may include home ownership, but if you can't afford to do it, you simply can't afford to do it. It's much better to rent for a few years longer then to make yourself house-poor and put yourself in such a tenuous position when interest rates have been rising. We rent because it allows us to keep our housing expenses consistent; with heat and HW included, it allows us to budget much more effectively. If you own a home you can't do that, and if you don't have some level of buffer then you will struggle. That's your choice - but don't expect anyone else to pay for it.

IMHO

[LaL 418]

oooh this is a tough one. I was watching the news last night on this topic and they reported that somewhere nearing 40% of loans in 2005 & 2006 were 100% loans - no downpayment. I was shocked. (I have to wonder if that number is really that shockingly high). Just looks like the mortgage companies wanted a BIG piece of that pie and the hungry homebuyers wanted a BIG piece of that bubble.

while i believe wholeheartedly in personal responsibility, i'm not sure what the outcome would be of foreclosures on this scale. I just am tired of seeing those who make REALLY poor decisions get bailed out without so much as a scratch to repair.

[Flames9_RN 359]

Enough babysitting!!! People should have common sense and know what they can afford. it doesnt take many brain cells to figure out what one can really afford. One should know how much money they make and what they can afford to buy. Yes there are occasions when unexpected finances amay arise,but soo many people just don't plan, they rather just stick their hand in the sand, then go cry to their family or gov't to bail them out.

[Nagishkaw 510]

flames9,

Well said ! And to add to your comment, to those who live beyond their means and expect the gouvernment to bail them out, that's cheating.

[Hilarious Clinton 452]

What's next? Giving illegal aliens foreclosed on homes?

[derekkj 0]

Enough babysitting!!! People should have common sense and know what they can afford. it doesnt take many brain cells to figure out what one can really afford. One should know how much money they make and what they can afford to buy. Yes there are occasions when unexpected finances amay arise,but soo many people just don't plan, they rather just stick their hand in the sand, then go cry to their family or gov't to bail them out.

Totally agree, Scott. Whatever happened to personal responsibility?

[Trumplestiltskin 5,791]

The lending industry does need better regulation. I was reading about credit cards the other day – that some customers have been paying their bills on time, but still incur late fees (which automatically damage their credit) because the card companies wait until the last minute to apply their payments. I learned that lesson once when I used the bank’s phonebank service which unbeknownst to me conveniently schedules your payment on the day it is due (because they earn more interest that way).

The assumption here is that lenders don't bury the most dangerous 'risk' clauses in the tiniest small print on the page. But obviously there is an issue of responsibility - but also on the lender to not mislead.

Edited March 23, 2007 by erekose

[ivona 0]

Wihtout wanting to stir that discussion again, but this reminds odly of the whole let's pardon illegal immigrants story....

What is the big moto of this government really- we take special care of our citizens who screw up?

I'm sorry, not good enough....

Yes, the practices of mortgage companies may be abominale, but COME ON:

First of all, people should stop being greedy and stupid and should start living within their means of income, as opposed to buying houses that they cannot afford.

Secondly, the first rule of of getting any type of loan and mortgage especially is: SHOP AROUND! When something seems too good to be true, you do extra research into it exactly because it seems too good to be true.

What does this really say to all those who pay their mortgage regularly? You end up feeling like an idiot, my mortgage comes out first working day EVERY month....hey! I have no problem pocekting that money, waiting for forclosure and the government to bail me out- except, that's not how it works...or at least, that is not how it should work

[Peikko 1,575]

How, exactly, do you stop people from being stupid?

[ivona 0]

It's not letting me edit, just wanted to add:

Credit cards are the same thing, yes these companies make profit out of putting people into debt and charging interest on it, BUT: you CAN at any time put a stop to the company rising your available credit at all time, Available credit decrease is something that the company allows you to do- except they put the responsibility in your hands to do it.

[Ban Hammer 13,678]

Wihtout wanting to stir that discussion again, but this reminds odly of the whole let's pardon illegal immigrants story....

What is the big moto of this government really- we take special care of our citizens who screw up?

I'm sorry, not good enough....

Yes, the practices of mortgage companies may be abominale, but COME ON:

First of all, people should stop being greedy and stupid and should start living within their means of income, as opposed to buying houses that they cannot afford.

Secondly, the first rule of of getting any type of loan and mortgage especially is: SHOP AROUND! When something seems too good to be true, you do extra research into it exactly because it seems too good to be true.

What does this really say to all those who pay their mortgage regularly? You end up feeling like an idiot, my mortgage comes out first working day EVERY month....hey! I have no problem pocekting that money, waiting for forclosure and the government to bail me out- except, that's not how it works...or at least, that is not how it should work

very good

[cbd2cai 0]

How, exactly, do you stop people from being stupid?

I think that is nearly impossible . . . look who got elected for president?

Oops, but that's another thread I think!!

[Ban Hammer 13,678]

How, exactly, do you stop people from being stupid?

less regulations. sink or swim.