Thursday, April 17, 2008

Mortgage Bailout, part 2

I had previously posted in defense of Bush's negotiated interest rate freeze. I still think that was a good idea, but the mortgage bailout in Congress really, really bothers me. I'm aware that I frequently come off as uncompassionate so let me start by stating that I feel for people who got themselves into mortgages they can't afford. I hear them all the time on the Dave Ramsey show and I wish they didn't get themselves in this situation.

Having said that here is what I see as the pros and cons of the bailout:


  • Real Estate values don't drop now. They're artificially high because of bad loans so they probably still drop later, but it might not be as precipitous a decline.
  • Some people don't lose their home.
  • Some people who bought mortgage backed securities (which probably includes a bunch of pension funds) don't lose value
  • Some mortgage banks don't go bankrupt (though most of them probably sold the securities already)

  • Anti-bailout

  • You're charging a bunch of people, the overwhelming majority of whom either don't own a home or are in a responsible mortgage, to shield a much smaller number of people from the results of their actions. This is made worse by the fact that many of the people paying are currently in a smaller house, have held off on buying a house when they could have done so irresponsibly, or have a higher interest rate than they would if they were in an ARM. This means people aren't just paying for somebody else to keep their home. They're probably at some level paying for somebody else to keep a more expensive home than they own for the same rates they're paying on theirs.
  • You're stabilizing house prices at an artificially high level, which means that those people who don't own a home now because they have been responsibly saving their money instead of getting a loan they couldn't afford will have to wait longer and pay more because they can't buy one sold at a discount by someone who got a loan they couldn't afford. Again this is aggravated by the fact that these people are also paying the bad loan holder to hold onto the house they would like to buy.
  • You're setting a precedent that the next time you hear a deal that's too good to be true on the radio and you know that a significant minority of the population is buying it, you can go ahead and take the risk because if things work out you'll get a better deal than being responsible and if they go south then you can probably get the government to bail you out if you can hold out long enough that it hits everybody else, too.
  • You're setting a precedent that if there are a bunch of very risky, but lucrative securities and you need to factor in the chances that the government will bail you out on the risky side to see if they're worth it.

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