No Real-Estate Bail-Outs with My Money

This article is going to seem cold, and maybe it is. But lately, as foreclosure rates have been soaring I’ve been hearing about quite a few politicians who want to help borrowers who got into their head with their mortgages. Many have ARMs and the rates on these have been increasing, making it tough for some to meet their payments. Across the country, mortgage delinquencies have been climbing sharply. The government should be bailing out these people en masse. Most knew what they were getting into and chose to ignore their situation or the market.

This article is going to seem cold, and maybe it is.  But lately, as foreclosure rates have been soaring I've been hearing about quite a few politicians who want to help borrowers who got in over their heads with their mortgages.  Many have ARMs and the rates on these have been increasing, making it tough for some to meet their payments.  Across the country, mortgage delinquencies have been climbing sharply.  The government shouldn't be bailing out these people en masse.  Most knew what they were getting into and chose to ignore their situation or the market. 

Let's go back several years, say four years ago.  I bought my first house then.  Before I purchased my house, I crunched all of the numbers to ensure that I could afford the mortgage payment along with my other expenses.

When I met with my mortgage broker, we discussed the different lending options.  He wanted me to get an ARM.  Rates on ARMs were historically low and a good percentage point or more lower than a 30 year fixed mortgages.  "No one is doing a fixed mortgage anymore," he said.  "They're out." 

I asked him what would happen if rates started to rise.  He told me that by then I would have sold my house.  "The average homeowner only stays in the same house for 3-5 years," he said.

It was tempting.  Get an ARM and I'd be able to afford a bigger house, a McMansion even.  My payments would be so low the family could take a trip to Disney or even buy a gas-guzzling SUV.  My wife would have plenty of money to decorate the house or do an addition.

I declined.  He also wanted to offer me a much bigger mortgage on a small down-payment.  He said most people put 10% or less down and used a home equity loan on top of their initial mortgage to ensure they weren't paying PMI. 

"But wouldn't that cause your monthly payment to be higher?" 

"Yes, but it's tax deductible and rates are so low, you might as well get as much as you can."

Ah okay.  But if you can't pay the monthly mortgage fee it doesn't matter how low rates are or how much of a tax deduction you get.

I went with a smaller house and a fixed-rate mortgage.  Instead of the trips to Disney we opted for smaller, local vacations.  We didn't buy the slick SUV but stuck with a low-priced mini-van.

Once I bought the house the home equity offers started pouring in.  You know the pitch.  Get a home equity line, use it to improve your home, increase your home's value, and deduct the interest from the home equity on your taxes.  Once again, it was tempting.  A new kitchen would have been great; a new bathroom even better.  Or maybe a family-room addition. 

But I decided that more debt on top of what I had just taken on probably wasn't the better idea.  We stuck with our older kitchen and our out-of-date bathrooms.

Maybe you see a pattern here.

Now, I hear about how the government wants to bail out everyone who took on too much debt, who made the wrong choices - using my money, my tax dollars.  I'm sorry if it just doesn't go down well.  There may be predatory lenders but even that term seems a bit like a cop-out.  At what point does an individual become responsible for knowing how much they make and how much they can afford? 

Call me heartless, but if you couldn't afford the house in the first place, why should I be the one to help bail you out.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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Comments

  • Anonymous

    July 11, 2007

    I agree 110%.

  • Anonymous

    July 11, 2007

    Some predatory lenders are pretty bad. They prey on people who don't fully understand what interest rates mean or the different types of loans. More education is needed but that doesn't mean we should throw these people to the wolves. It's a tough situation.

  • Anonymous

    July 12, 2007

    I think that this was an idea that was passed by Charles Schumer a couple of months ago, and didn't get much traction. I would expect it to come up again, but I don't think that too many in DC are likely to jump on the bandwagon. Any sort of a bailout would be highly unfair to those who exercised better judgment when offered subprime loans.

  • Anonymous

    July 12, 2007

    I disagree with this article. It's easy for the members of this site to say that others should have known better,but that's just not the case. Just because someone is less-educated doesn't mean they should be a candidate for abusive practices.

  • Anonymous

    July 12, 2007

    Here's an article in today's Boston Globe.
    http://www.boston.com/business/globe/articles/2007/07/11/state_to_refinance_troubled_mortgages/

    This effects everyone negatively. My taxes go to pay for this, lenders are forced to take right-offs which will only increase rates, and low-income borrowers in the future will have a tougher time getting a loan.

    Where is personal responsibility?

  • Anonymous

    July 12, 2007

    No, you are not wrong. It is amazing. What do I need to do for a handout too?

  • Anonymous

    July 12, 2007

    In theory I agree with you although there may be extenuating circumstances. I'm sure those are the ones that will receive the aid.

  • Dave Lloyd

    August 07, 2007

    I think that we need to prepare ourselves for the fact that it is going to happen at some level, like it or not. The government and the public are not going to tolerate half of the country living in Hoovervilles while the other half is living in Palo Alto or Greenwich.

  • Peter Than

    August 31, 2007

    It seems to be too hot of a political issue for it not to happen on some level.

  • LikeItIs

    September 01, 2007

    "The government's got a role to play. But it is limited. A federal bailout of lenders would only encourage a recurrence of the problem," Bush said in a statement in the Rose Garden.

    Meanwhile, at a central bankers' symposium in Jackson Hole, Wyoming, Federal Reserve Chairman Ben Bernanke made clear that he was following what analysts have described as a "tough love" policy toward borrowers and especially toward lenders.

    "It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions," Bernanke said.

    THANK YOU!

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