Looking At The Latest Bailout « Smart Borrower Blog

Looking At The Latest Bailout

Oct 31st, 2008 @ 4:38 PM by Alden Smith

The news tell us that the government is preparing a $40 billion plan to help American homeowners who are currently in trouble with their mortgages. What about the other side of the coin - the people holding a fixed rate mortgage and have the ability to pay? What are their thoughts on all this?

I read an article in The New York Times this evening that addresses just that. It has been reported here time and time again on the blog about people who have mortgages that are “under water” and putting these homeowners in a position of owing more on their home than it is worth. This group of people, which by the way includes myself, are a bit disgruntled that they have kept up with mortgage payments for years and now find themselves in this position.

The NYT spoke about an airline pilot named Todd Lawrence, who lives in Norwich, Conn. Mr. Lawrence, like so many others, has a home that is under water. He feels that the banks, who have acted irresponsibly in the past, should be doing something for the people that have kept the faith. Why should he have to take a hit, when people who have borrowed irresponsibly are getting bailed out? Especially when he has been on time and never missed a payment on his home. Mr. Lawrence had this to say: “Why am I being punished for having bought a house I could afford? I am beginning to think I would have rocks in my head if I keep paying my mortgage.”

Is his point valid? From my point of view, it is a double edged sword. On the one hand, many homeowners have acted responsibly, made their payments on time, and did everything possible to see that they met their obligations. Many others, on the other hand, borrowed irresponsibly and got into home that both they and the lending bank knew they could not afford. This group is getting an opportunity to be placed on an equal footing with those that have struggled to make ends meet. The bailout being proposed is said to be designed to aid up to three million homeowners that are in a bind by reducing their monthly payments. The group that has made their payments, regardless of the personal difficulties involved in doing so, get nothing for their efforts. Mr. Lawrence, our airline pilot, has this to say: “I’m basically financing my own financial destruction.”

It would be next to impossible for the government to make the needed moves to cause stability in the mortgage market without stepping on toes. The market is so mixed right now that you could find every conceivable type of situation, all with its own unique circumstances. Try to figure that out and you end up with the largest financial mess in American history.

I found it interesting that responsible people advocated for homeowners to stop making mortgage payments so that they could take advantage of the newest bailout. Peter Schiff, the president of Euro Pacific Capital in Darien, Conn., says he thinks just about everyone who is underwater and has few other assets should stop paying. “If the government says, ‘Prove that you can’t afford your house and we’ll redo your mortgage,’ then people are going to try to qualify,” Mr. Schiff said.

To me, this is like hearing strategies that would come out of a third world country. Is that what this is all coming down to? We see billions dropped on Wall Street banks that have acted irresponsibly, and then hear noises like the ones coming from Mr. Schiff. I don’t know about anyone else, but to me the handwriting is clearly on the wall.

Posted in Mortgage Refinancing, Mortgages
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