Angry about government bailouts to homeowners? Cry me a river!

A few years ago, my wife and I contemplated buying a duplex in a shabby-but-promising area of Roanoke, Virginia. It was located near the bustling downtown, close to an emerging arts center. Housing prices were depressed, as the neighborhood was in the beginning stages of gentrification, and many first-time homeowners were homesteading the area.

Neither my wife nor I made a lot of money, but our credit was decent, and we were able to qualify for a variable-rate mortgage. For the first five years, we would have had a very reasonable fixed rate, after which the rate would have risen sharply. Our plan was to get the house, make some improvements (I'm very, very handy), work on our credit, and refinance before our interest rate skyrocketed. While our lender couldn't promise us that we would be able to refinance at a lower rate, he led us to believe that, with our credit history, we would have a very good shot at getting a decent fixed rate.
As my wife and I thought about it, we realized that our plan depended on a lot of ifs: if our credit improved and if the neighborhood improved and if the economy stayed the same and if we found some decent tenants for the other apartment and if we were approved for a new mortgage in a couple of years, then the whole plan would work and we would have our sweet little piece of the American dream. Ultimately, we decided that the plan had way too many ifs, and we couldn't bank our financial future on a complex series of events. Looking back, it's pretty clear that we dodged a bullet. After a brief upswing, the neighborhood started to go back downhill. In the meantime, the cost of gas went through the roof, the economy started to tank, the subprime mortgage balloon came due, and banks are currently keeping a very tight lid on new mortgages. Had we bought the house, we would probably be living in a depressed neighborhood right now, surrounded by shuttered homes and staring down the barrel of ballooning mortgage payments.

While I'm incredibly glad that my wife and I managed to avoid financial disaster, I feel a great deal of sympathy for homeowners who weren't so lucky. After all, many of them were faced with the same situation as I. However, rather than think about it carefully, they took the advice of their lenders and went with mortgages that they couldn't afford.

The newspapers are currently filled with people arguing against helping distressed homeowners. Some of these dissenting voices are renters, and I can understand why they might be opposed to a bailout. However, the most vociferous objections seem to be coming from other homeowners. Their argument seems to revolve around the fact that they were wise and responsible, only borrowing money that they could afford to pay back. Presumably, people who were stupid enough to borrow more than they could afford should suffer for their stupidity. This attitude was probably best expressed by Paul McCulley, Managing Director for PIMCO, an investment company. Asked about a proposed bailout for homeowners, McCulley stated that "the fool is going to be rewarded and I, the taxpayer, will be put at risk at the margin for the handout to the fool, when all I did was exactly what I was supposed to do. Where is the fairness here?"

It's hard to imagine a more selfish, shortsighted perspective. After all, while responsible borrowers should certainly be commended for their fiscal wisdom, it's worth noting that, when banks start foreclosing on houses, neighborhoods empty out. As homes remain vacant, yards get overgrown, windows get broken, and property values plummet. After all, it's not as if there are scads of responsible borrowers waiting in line to buy overpriced tract homes in suburbia. If subprime borrowers fail en masse, as they seem likely to do, property values will drop across the board, hurting the very people who are currently baying for the blood of failed borrowers. To put it more bluntly, self-righteousness is not a hedge against a failing economy.

If, on the other hand, subprime borrowers are allowed to pay back their mortgages at artificially restrained interest rates, they will, most likely, remain in the houses that they have worked so hard to get. Many of them will take care of these homes, mow their lawns, invest any surplus money that they have into improvements, and generally do their best to increase property values. While real estate prices are bound to drop from their badly inflated high points, they won't completely plummet, which will enable even the naysayers to benefit from the Federal bailout.

As for those, like myself, who were wise enough to rent when we couldn't afford to buy, the bailout will help stabilize the economy, will (hopefully) keep the credit crisis from spreading too far beyond the realm of delinquent mortgages, and will minimize the numbers of former homeowners who will be crowding the rental market and driving up rents. While I am not eager to have my taxes go to bail out people who borrowed stupidly, my taxes fund many, many things that I don't personally endorse. Moreover, I would vastly prefer that my money go to individuals who were blinded by their desire for home ownership, rather than the financial institutions that manipulated their desires to offer mortgages that were doomed to failure.
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