As the Treasury Department prepares a $40 billion program to help delinquent homeowners avoid foreclosure, it confronts a difficult challenge: not making the plan too tempting to people like Todd Lawrence.
An airline pilot who lives outside Norwich, Conn., Mr. Lawrence has a traditional 30-year mortgage that he has no trouble paying every month. But, thanks to the plunging real estate market, he owes more on his house than it is worth, like millions of other people.
If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Mr. Lawrence says he believes sober souls like himself are also due a break.
“Why am I being punished for having bought a house I could afford?” he asked. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”
And what about the people like me, who paid for their house? Shouldn’t we be reimbursed for the fall in value due to the fraudulent mortgage bust?
Not to mention the losses in my retirement account.
Only half-kidding.
But where does one draw the line in helping people out of their own folly?
My wife and I are both retired, we bought our brand-new home here in Los Banos five years ago, and we have a 5.6% fixed rate conventional 30 year mortgage. Even though we paid $100,000 down, we still owe more than what our home’s worth on today’s market. But guess what? This is our retirement home! We don’t plan to sell at any time for any reason! We’re here to stay! We don’t expect any breaks, and we’re not going to ask for any. I guess this puts us in the minority who believe in honoring one’s moral obligations, and if that’s the case, then so be it! We’re not going to skip out just because the going’s tough.
Once the Treasury plan details emerge we can analyze in depth. But I share the previous concerns about government programs that have the effect of rewarding those who engaged in financially irresponsible behavior. I seem to remember a parable about wise and foolish brides.
There is a much larger story that is not being reported. Major lenders are embarking on a serious loan modification campaign. However, the proposed mods are a mirage. In most cases they involve lowering the rate to 2-4%, interest-only for 3-5 years, after which the loan reverts to its original terms.
Excuse me, but isn’t that one of the major factors that got us in this mess in the first place, i.e. teaser rates? Given the lack of expected appreciation in the near future, all this does is push out the foreclosure into the future. Lenders like it because it delays the impairment of their balance sheets (a la the Latin American defaults in the 80s). But unless there is a long-term workable modification strategy, we are simply creating another financial mess in a few years. Modifications need to solve problems, not just delay them.
[blockquote]The ultimate result of shielding men from the effects of folly, is to fill the world with fools.[/blockquote]
– Herbert Spencer
[i] Comment deleted by elf. [/i]