Friday, December 2, 2011

Should we bail out underwater mortgages?

It's somewhat difficult to understand the efforts to address the plight of homeowners who are declared "underwater", that is who owe more than their homes are worth. Neither walking away from one's mortgage obligation nor foreclosing on a property is the best answer.

The value of one's home has nothing to do with one's ability to make mortgage payments. A mortgage is a loan, an obligation that must be paid back. Whether the value of the mortgaged property tumbles or rises has nothing to do with one's ability or obligation to repay the borrowed money.

No one would tolerate a bank, or any lender writing the following note:   
Dear Mr. Homeowner, 
We notice that the value of your asset (house) has increased in the past two years and the Federal Government has given us permission to increase your monthly payments. 
We will let you know the new terms of the loan and your new payments soon. 
Your Friendly Bank.
A homeowner can have trouble making mortgage payments due to illness, job loss or some other legitimate reason and compassion dictates that banks and borrowers try to work out terms to their mutual satisfaction. If the original sale or mortgage were based on deception and/or misrepresentation then that too would be a proper basis for voiding or at least re-negotiating a contract. 

But it's wrong to force wholesale rewriting of contracts because of falling market prices. Otherwise we could require the corporate issuers of stocks and bonds to buy them back at their original value when the market goes down and our retirement plans drop in value as a result. 

Those who hate government regulation of financial institutions and other business would be more correct to blame their successful deregulation efforts, (repeal of Glass - Steagall), for the disaster that engulfs Americans today.

We need more regulations but they must be more intelligently crafted and properly enforced if our goal is to prevent another disaster driven by corporate greed. And people need to understand that if they consider their homes solely as investments, well, investments aren't guaranteed. That's just the way it is.

Maybe It's Just Me     


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