President elected Obama announced his $75 billion plan (on top of the 400 or so billion in losses absorbed by Fannie Mae and Freddie Mac) to help about 7 to 9 million homeowners. If you split 75 billion equally among those 9 million homeowners, each one would get just over $8,000. How is this going to work? Many of these homes that are in danger of foreclosure cost hundreds of thousands of dollars. In light of that, what will $8,000 do? Apparently, there is more money at the president's disposal-I heard at least a couple hundred billion or so.
How did we get here in the first place? During the 19th century, people moving to the western frontier built their own homes. Shelter is one of the basic human necessities. How are we, in the 21st century, on the verge of evicting millions of homeowners, essentially depriving them of this right to shelter? How did housing, which used to be a simple one-room structure built of rough-hewn trees, get so complicated?
What is government's responsibility in guaranteeing shelter? That depends on who you ask. 1)Some would say that it is to provide every person a very comfortable standard of housing.
2)Others would say government should provide only a minimum standard of housing.
3)Yet others say each person is responsible for their own housing.
With this latest bailout, it seems our country is moving frighteningly close to number 1. I fall somewhere between 2 and 3. People need housing, and we should be able to provide this in what is still the richest nation on the earth. However, if we provide everyone with a very comfortable standard of housing, there will be no incentive for them to work to attain that standard and contribute to society. This latest bailout is a nasty redistribution of wealth. The whole premise of this country is that people have the liberty to earn the standard of living that they desire. Inherent in this premise is the unavoidable aspect of RISK. We cannot eliminate this element of risk. Risk and reward go together like peanut butter and jelly.
This mortgage crisis is complex. It started with cheap money, which led to speculation. This speculation, coupled with government coercing lenders to make sub-prime loans (hey, everyone deserves a very comfortable standard of housing, right?) to many who could not afford the monthly payment is at the root of this problem. What kind of sense does this make, to get families into homes they cannot afford? It spells bailout. President Obama said today that people need to live within their means. Where is the motivation to do this when government shields people from the consequences of doing just that? Would we be in this crisis if we simply provided less-fortunate people with adequate housing, instead of prematurely moving them into being homeowners? Homeownership assumes risk. The government cannot assume this risk for all homeowners. My sister has been married for 5 years. She and her husband have 2 children, but they are still renting an apartment. I am 36 years old, married for 5 years, and I have never owned a home. I would love to own a home, but I am not ready to assume the risks associated with homeownership, and I don't expect anyone to assume them for me.
Yes, there are some people who are in need of help, that have truly fallen victim to this mess. Yet, government is not going to come to the rescue of the people that really played by the rules, that did not buy more home than they could afford.
Paul, The whole system got out of control a few years ago. When Bill and I first bought a house [1979], qualification terms were strict and a 10% downpayment was mandatory. The lack of regulation coupled with unscrupulous practices on the part of lenders and others got us where we are now. There is blame to be shared by both private and public sectors.
ReplyDeleteI, like you, don't like being in debt. We are a minority view, however. It would take quite a sea change in our citizen's attitudes to get away from a consumer [and credit] culture. If things get a lot worse, that change could be more likely to occur.
Are we depriving them of their right to shelter? There is no "right" until they hold the trust deed and note in their hands. In the meantime all there is is a contract, one that those being evicted have violated the terms of and by so doing surrendered any "rights" they had to the property.
ReplyDeleteSome of those contracts are deceptive and never should have been there in the first place, because the lenders shouldn't have created them and the buyers should have learned what was in them and avoided it.
Others are perfectly normal contracts that are being accelerated as a result of job loss and/or medical issues. Sadly this is coupled with lack of emergency savings, excessive consumer debt/spending, and inadequate insurance.
I think my rose colored glasses are foggy.
Dr. Piercy and Lucas,
ReplyDeleteThanks for your comments. If lenders knew there would be limited or no help to bail them out for making risky loans, they would raise the credit standards and require a down payment, right? Regulation could do the trick, but what about letting capitalism provide the incentive and consequences for making sound lending decisions?
Did you ever consider that someone has to take a risk at homeownership for you to be able to rent?
ReplyDeletePaul, there never was a promise for bailout money to begin with. When banks saw the success of the subprime market they joined in rather than create affordable alternatives. Changes to CRA legislation certainly didn't help matters much either. Even during the subprime boom we had more sub prime mortgages going under than we had new homeowners coming in. Even at its peak it had a negative effect on net home ownership.
ReplyDeleteSo banks just got greedy? While I know that is the case, I thought that Fannie and Freddie were coerced into making risky loans by the government, to help people afford home ownership. Am I correct?
ReplyDeleteChanges to CRA legislation where championed by them. It is actually the Banks who were coerced by the government. Fannie and Freddie had everything to gain by the new legislation, since they would be the ones securitizing the new loans (which as subprime would have higher profit margins). Look behind the senators who championed the bill and you will find Fannie and Freddie.
ReplyDeleteOnce the boom started then banks figured if they cant beat them, join them. Consumer borrowing rocketed, with banks lending out in some cases 35 to one (and successfully lobbying to have depression era constraints on lending removed).
It was greed in both cases.