Tuesday, October 9, 2012

Underwater mortgages

I'm confused. A person borrows money to buy something (if it's a house it's called a mortgage). If the value of the purchase drops, the lender is being asked to decrease or forgive the amount borrowed ("principal forgiveness").

But what if the value of the purchase were to increase instead of decrease, as it often did in the recent past? By the above logic, a lender should be entitled to get more than the amount that was borrowed. 

What does the change in the market price of the purchase have to do with the amount of money that was borrowed? It's a loan and needs to be paid back.

Now, if a buyer borrowed more than he or she could afford to repay in the hope that the value of the home would rise and be sold for a profit, that's gambling. Why should the lender be on the hook for the buyer's speculation?

On the other hand, if the lender deceived the buyer in some way, in order to make a sale or get a fee for refinancing a mortgage, the lender should be prosecuted.

Sensible, fair, regulation of banking (among other things), administered by honest and competent people is the only real solution to the problem that got us to where we are. 

Unfettered free markets as touted by the far right Tea Party and libertarian ideologues might eventually self regulate but not before destroying a lot of people in the process.

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