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Posted by on Mar 26, 2010 in Economy, Politics | 29 comments

The Prudent Man’s Burden

Not being a professional literary critic I don’t do too many referrals to the work of the other fine authors here at TMV, but this morning I will make an exception. In case you missed it yesterday, I would strongly suggest that you read the column by Robin Koerner, Obama; If This Is True, then Shame on You. Rarely do I run across such an exceptional piece which takes a subject which has been uncomfortably nibbling at the corners of my mind and crystallizes it into an understandable framework. I have already forwarded the piece to many, many friends.

It tells a story which is, unfortunately, all too common today. But more to the point, it asks an important question which all of us should be considering as we debate the future course of the country. To abbreviate a good bit, it tells the tale of someone of modest means who purchased a home, only to see the market value of the property plummet. They also found themselves hitting hard economic times, but made sacrifices and found a way to struggle through and hang on to their home. And now the federal government seems poised to move on a plan to bail out many other homeowners who did not exercise such prudence.

We have faced many such questions in our country which are frequently complicated by other factors such as race, gender, sexual orientation or economic status. Think of it as the “white man’s burden” quandary. Challenges have been raised regarding government programs which provide “set aside” contracts for minority owned companies, special college scholarships for women, jobs and housing programs and more. If someone – generally a white, non-disabled, heterosexual male – dares to raise a hand and say, “wait… what about me?” they are quickly shouted down. We are trained to look down on anyone who asks such a question because. no matter how hard that person may have worked or how deserving they might be on a truly even playing field, they simply “can’t understand” what it’s like to be a woman, or black, or gay, or what have you.

But what of the scenario Robin describes? Now all questions of race, gender and sexuality have been wiped from the board. The issue has special relevance for me as well, because I’ve been dealing with a very similar situation. We also purchased a home during the boom days of the 90s and have since seen its market value drop basically in half – less than what we still owe on the mortgage. I also took a major hit on the employment – income front and we’ve found it very hard to get by. A heck of a lot of belt tightening and lifestyle changes were involved. But somehow we managed to keep making our mortgage payments and are still in our home.

Unlike Robin we landed a relatively low, fixed rate mortgage, but it took some financial gymnastics to manage it. We had to save up for a while and then go into a “rent with the option to buy” arrangement with the seller. For those not familiar, this is a contract where you rent the home you wish to purchase for a few years, paying an inflated rental rate. A portion of this monthly payment goes into an escrow account which is used to add to your down payment at the time of purchase. If you fail to buy the home, the seller keeps the extra money. This arrangement allowed us to put down a larger payment up front to lower our mortgage payments and secure the low, fixed interest rate. It took time, but it was worth it, and we have remained safe from those skyrocketing, adjustable rate traps many people have fallen into with huge balloon payments coming due.

True, my house now has a much lower “market value” than it did when we bought it, but I didn’t buy this as some sort of investment opportunity with some plan to “flip it” and get rich quick. This is my home. It’s where I plan to spend my retirement years. No matter what the real estate market says it is worth, it still has the same value to me as when we purchased it. The roof still keeps the rain off my head and the walls and windows hold in the heat during the winter. It is, in short, worth what I paid for it – at least to me.

And now the government is going to take my tax dollars – and your tax dollars – and bail out the people who didn’t manage the same thing, some of whom, frankly, bought homes they really couldn’t afford and took risky mortgages with built in time bombs? Tagging on the previous column and continuing the 2010 version of the White Man’s Burden analogy, I’ll ask the question. What about me? What about Robin? What about the people who “did the right thing” and will now watch others reap the rewards? Is this the direction we need to be going?

I already see comments in Robin’s column about the one article of defense which liberals seem ready to pursue on this. “So you think we should just let the housing market continue to collapse and have people keep getting foreclosed?

No problem. I’ll field that question. The answer is yes. Like it or not, the real estate market is part of the larger free market and property only has the value people are willing to pay for it. If the prices were too high, inflated in an artificial bubble, then they need to collapse to wherever the floor is that the market can support. It’s a painful process, but it’s a needed correction. And for your information, home ownership is not a “right” in our country. It’s a desirable goal which most of us want, but it requires work, planning and quite frequently, sacrifice. And sometimes bad fortune hits people and those goals can be derailed. This is the nature of reality. We don’t live in Nirvana where everyone is assured the best of everything and there is no insurance against ugly twists of fate. And it is not within the power, ability or duty of the federal government to try to create that Nirvana.

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  • $1690528

    Jazz,

    I enjoyed your reprise and the original article. Maybe the only place I quibble with you is in your discussion of the market. The market has already collapsed. The price at which these homes can be sold today is fixed by the market.

    What we are currently debating is two things. One, who should bear the burden of the lower housing prices, the people who bought the house or the people who didn’t buy the house. The second question is how do we want that burden borne.

    The Obama administration answers that we should have people who didn’t buy the house bear the burden, unlike you and the original author. Is this fair? Well, no, but few things that involve politics are fair. As an example, is it fair that many people paid a much lower SS tax for most of their work life than I did for most of mine? Arguably no but so what? I should also point out that there is no guarantee that this plan will pass or that you would be eligible even if you did. So, even in a bailout world, there can be a pretty good argument for being prudent on your own since, if the bailout doesn’t come or you aren’t eligible, there’s a strong practical argument for solving the problem yourself beyond the moral argument of being responsible for your own decisions.

    The second, and to me, more disturbing aspect of this is the how. Let’s compare the bank bailouts with the proposed housing bailout.

    For the banks, the money was loaned by the government to the banks with the expectation that it would be repaid (as it mostly has). It was in effect a bridge loan. You can argue we shouldn’t have made the bridge loan but it would pass any reasonable financial test as a loan given the performance (leaving aside AIG (not a bank) and the car companies (not just a loan)).

    For the homeowners, it’s quite different. It’s both not a loan and likely not to be paid by the Federal government and that is by design. The likely provision is an adjustment to the balance sheet of the mortgage holder with no Federal involvement other than a mandate. Thus, the cost is permanent (because it’s not a loan), invisible (because it will be priced into bank spreads and new origination mortgage rates), and nongovernmental (because it will be all carried out in the private market).

    If the government had the courage of its convictions, it would give homeowners exactly the same deal it gave banks — additional government money at a very low interest rate to cover the period of adjustment. But that would assume the homeowners would/could adjust and that the government would want to own up to what this would cost.

  • Everyone rightfully has the option of strategic default. Unfortunately, even without government interference, people (and businesses in the residential real estate game too) who are foreclosed on will be impacting home values of those around them regardless of any wise decisions and investment choices, and regardless of our financial or employment circumstances or our desires to keep, sell or rent out our homes.

    It is swiftly turning into a domino-effect — foreclosures lead to more foreclosures which are now leading to strategic defaults on top of even more foreclosures. Is it better to stem the tide and give people on the fence the incentive to hang in there, give the struggling people more tools against the banks that have been dragging their feet with mortgage modification programs that usually don’t do enough if they even successfully jump through the random hoops the banks set up? Do we let housing slide all the way back down to pre-boom levels leaving the majority of homeowners upside down on their mortgages?

    Your choice and the previous author’s choice to buckle down and hang onto your homes was your choice, as was your choice to purchase a home and the price paid. It is also your choice to stop paying the mortgage and let it be foreclosed on at any time — the “punishment” for that goes as far as the legalese written into your contract with the bank and state law. Unemployment is not a choice for millions of families, and neither is relocating, huge medical bills and plenty of other reasonable scenarios that are causing people to break under the weight of their mortgages. Even the previous author’s contention that having children is a choice only makes allowances for health, age, religious belief and any other number of circumstances. We all have many, many individual choices which is why *everyone* including the White Man feels burdened when coming up against something as massively faceless as government.

    Real fairness would be the lack of inequity – in this case, the lack of a residential housing bubble or unemployment or a deep recession. Real life economics however is intervention to keep the entire economy from sliding any deeper or remaining there. The deeper and longer the trough, the longer and worse off we all are.

    Is it wrong to show up 3 days after a ship sinks to look for survivors? Is it unfair to pull 2 people out of the water when hundreds of others drowned? Is it a slap in the face of the people who swam to safety on their own? I think the true injustice would be to tie everyone to the rails of the ship just to feel vindicated that no one else got any more breaks in life than anyone else.

    At the end of the day we are all individuals making individual choices. I see merit in giving people a chance to remain in their homes if they are willing to do the legwork. The only thing that can make anyone’s house worth what it previously was is if the prices stop going down and start going up. We can either wait 20 or 30 years, or we can take action. My generation is being swallowed alive by this economic crisis in more ways than just housing, and there is already evidence that this recession will set back the next generation as well. Extraordinary times really do call for extraordinary measures.

    If we all learn nothing else from this severe economic crisis, may we at least learn to better weigh the true consequences of any decision we make.

    • Dr J

      May we at least learn to better weigh the true consequences of any decision we make.

      Not at this rate we won’t.

      • Is the only way to learn fiscal responsibility to be foreclosed on? Really?

        I kept making my mortgage payments when my house was 90% its purchase price, then 85%, then 80%. I kept making them when we were due to relocate halfway across the country and my house was up for sale. My husband looked for a job for months in this area so we could stay in our house because it would not sell, so we took it off the market and we have never been late on a mortgage payment yet. I was hospitalized last year and have had 2 surgeries since, and I go to the doctor every week to manage my condition. We’re juggling copays, deductibles and coinsurance along with our mortgage every month. My house is now worth 75% what we paid for it, not including repairs and improvements we made.

        We bought the least expensive and smallest house we could. We unequivocally rejected attractive but dangerous ARMs and went with a 30-year fixed rate. Our mortgage payments used to be less than rent would be for a similar place. We did everything right except for coming to age during this unprecedented housing market.

        If things keep going the way they are, it would make more sense for us to mail my keys to the bank and walk away. Would we learn a lesson? Yes, we would learn what it is like to lose our home, at least $30,000 in equity and sweat equity as well as countless hours of labor, and over the next 7+ years, how to deal with having a crap credit rating.

        Would that make us better homeowners somewhere down the line? No, it would likely make us rent from some corporation for the rest of our lives to avoid ever having to deal with this mess again.

        The American Dream isn’t everyone owning a house so we can all be homeowners and have weekend bar-b-ques with our neighbors. It is individual ownership of property instead of having the crown, the government, the nobility, the landed gentry and the corporations owning land and the rest of us working just to line someone else’s pocket and their decent’s pocket and so on.

        People are learning lessons whether they are watching their house auctioned off or getting financial records together to see if they qualify for reprieve. Don’t cheapen their sacrifices because they don’t match your own.

        • Dr J

          Lotusflwr, I’m going to decline your invitation to second-guess your decisions. Like me, and like everyone else, we all make a million decisions and experience a million turns of fortune and get to a million resulting outcomes. Some are good, some are bad.

          The question is when it’s appropriate to pass on your bad outcomes to other people…or to be compelled to take on theirs.

          I don’t have a simple answer, but IMHO the existence of bad outcomes is not reason enough, because there will always be bad outcomes. Nor is “let them suffer enough to teach them fiscal responsibility” a useful principle, since fiscal responsibility is such a sliding scale, there’s no one “right” level of risk to take on, and people learn (or don’t) at very different rates.

          The most solid argument I’ve seen raised here is your pragmatic one that other homeowners will suffer from foreclosures anyway, so it’s reasonable to make them fund a bailout. This is pure self-interest, of course, but it steers us clear of the quicksand of figuring out who “deserved” what outcomes.

    • casualobserver

      You’ve articulated your point well. The “cut your losses” theory has pragmatic appeal.

      However, just as 99% of the population didn’t see the bubble inflating (or at least didn’t take actions to indicate they did), there is nothing to support all the speculation that the crashing will just continue.

      Let’s look at the only fact in evidence…….the banks have paid back the TARP loans which means they’ve written down the loans to at least where the regulators and auditors are signing off relative to the risk-based capital calculations. You can speculate that these are overvalued still, but I will speculate the banks have reached a point of accounting equilibrium where they are now just bleeding further writedowns in against period income and not really showing much stress from the writedowns. Leave them alone at this task and I suspect in a few years nothing will be overvalued.

      However, if you and Obama throw a big hit their way with unplanned writedowns, you will actually be the one to cause the uncertainty to precipitate another crash……because no one is going to believe round 1 is not going to beget round 2 and so on. You may well cause the further chaos you think your actions are insuring against.

    • Wonderful comment lotusflwr.

      Foreclosures and vacant homes have costs to the public purse and to the banks. They are more likely to be vandalized or to burn down, they become eyesores that lower surrounding home prices, they are harder to sell when vacant (ask any realtor) and of course, it is costly to foreclose on them, to have no payments while trying to sell them, and of course ultimately the bank will never sell them for the overvalued price anyway. They will be lucky to find a new buyer to pay the mortgage that could be paid by the existing homeowner without all the trouble and expense.

      There is a genuine advantage to everyone, the homeowner, the police and fire departments, the taxpayers and the banks, to keep current homeowners in their homes. It makes to adjust the principal to reflect what the bank would be forced to accept for it if they foreclosed on it, assuming of course that the original homeowner is able to make the new payments, just as a new buyer would be expected to.

      • For once this interactive community discussion forum has worked. I’m sold. I have been convinced by GreenDreams and lotusflwr. I know you may think this sounds like snark, but it’s not. I’m serious. I’m going to keep an eye on this proposal and if it goes through, I am absolutely signing on. I’m going to stop sending in my mortgage payments – God only knows I have more than enough reason given the juggling we’ve had to do to make them this last six months – and get my mortgage balance cut in half and my payments suspended and then reduced.

        Why should I keep paying and worry about being accountable if everyone else isn’t going to be in the same boat? What kind of chump am I here? We’re facing serious fiscal crunch times. In fact, if I can get the mortgage suspended and then reduced, there are also some other good programs I’ve read about. HEAP pays people’s heating bills, right? And there’s foodstamps and all other sorts of programs. Screw it. I don’t need to bust my ass. I can work a patchwork of freelance assignments and spend most of my time not working and still get my bills paid. If the nation’s course is to rearrange the deck chairs of the Titanic, I’m going to grab a couple and drag them over to the shuffleboard field.

        • TheMagicalSkyFather

          It’s cocktail hour over here but could you bring me a cushion, the hard plastic is starting to hurt.

        • good plan, Jazz, if your credit rating is not important to you. The same, in fact, could be said for declaring bankruptcy or getting a settlement on your credit card debt. None of this is new.

          The GOP fiscal policies ravaged the treasury for the benefit of a wealthy few and corporate interests, including war profiteers. Ultimately, though, “deregulation” of banks was foolish, because that market did not, and does not self-regulate. They drove the economy into a ditch, requiring a number of lifelines to be thrown, as mentioned by others, at banks, car companies, etc. That seems to have dramatically improved the situation on Wall St. but not so much on Main St. Now, recognizing the plight of many families, perhaps including your own, caused by the GOP-induced recession, lifelines are being thrown to those on Main St. This includes the unemployed, those facing medical bankruptcy and those facing foreclosure. The cost is high, just as it was to bail out the rich, and when our fortunes improve, we can address reforming the federal government in ways that make it work better.

          Jazz, I too have been responsible and paid my mortgage and credit card companies, and all the rest. Unlike you, I guess, I do not resent the lifelines now being thrown to those less fortunate than myself. Even though you and I rarely agree on much, you are part of my tribe, the American tribe, and I believe in my tribe being adequately nourished, clothed, housed, educated and cared for when sick or injured. I am convinced that this will improve our ability to thrive and to compete globally.

          Let me mention, too, that the improvement in house sales is almost all the effect of speculators snapping up foreclosures at bargain prices. That’s not good, IMO. BTW, though I don’t think you’re comment above is serious, it may be fruitful for you to demand to see the original signed note on your property. With all the bundling and reselling, it can often not be found. In that case, the house is yours, no further payment necessary.

        • shannonlee

          Now that is the tone of a tea partier.

        • Dr J

          Well, duh, Jazz. There are those who pull the cart and those who ride in it. Only idiots are still in the first group.

          • “Well, duh, Jazz. There are those who pull the cart and those who ride in it. Only idiots are still in the first group.”

            Funny. I think most Americans, especially middle income and below would say the same. They’re in no doubt about who is riding, and it’s not them. I’ll bet they won’t be voting for the affluent whiners who feel so put out at every attempt to help the needy instead of the greedy.

          • Dr J

            I’ll bet they won’t be voting for the affluent whiners who feel so put out at every attempt to help the needy instead of the greedy.

            Very operatic, GreenDreams, but kindly connect it with real life. Which category are you putting Jazz and Robin in?

  • $199537

    The dilemma here is that what is right from a “fairness” standpoint may not be right from a pragmatic standpoint. This was the same dilemma we faced with the bank and auto bailouts. The banks deserved to fail, GM and Chrysler deserved to fail, but their failure might have pulled us down along with them. We held our noses and bailed them out.

    I think we are in a position where the prudent man will be screwed either way. If we help the underwater homeowners we are rewarding imprudence, if we don’t then the market and economy may collapse further. The debate then is which is the lesser evil.

    • TheMagicalSkyFather

      No matter how many times I try to click “Like” it will only allow me to give you a single point, I may need to break out a flux capacitor and see if I can make time travel the answer to this problem.

    • $1690528

      Excellent post which means we should be looking at multiple approaches to help the underwater homeowners and pick the lowest cost/highest reward solution.

    • Jim_Satterfield

      I almost clicked on the Like button. But…helping the underwater homeowners is not necessarily rewarding imprudence. There are some who got that way through imprudence but there are many who did nothing wrong when it comes to their homes being underwater. That situation is an entirely separate issue from signing on for mortgages they should never signed up for or been approved for.

  • elrod

    I agree with the other commenters here. Many – if not most – of these underwater homeowners don’t “deserve” to be bailed out. They sought the high-end house in the suburbs that the couldn’t afford with the granite countertops and two-car garage. And they used the HELOC to buy that new flat screen TV. That they were enabled by drug pushers er… bankers, accountants and real estate brokers doesn’t take away the buyer’s irresponsibility.

    But the cumulative effect of these bad choices means that those who play by the rules get punished too as their property values plummet alongside the fools. The exact extent to which this is happening is a mystery to me. But I have no doubt that millions of American homeowners who played by the rules and lived within their means have been and will continue to be punished because of the snake oil bought and sold by irresponsible people a few years ago. And it’s for that reason alone that I support a Federal intervention to stop this cycle.

    My hope, of course, is that those who really did take on more than they could handle get punished with a bad credit rating for a long time.

  • ProfElwood

    There’s a couple of problems that I’d like to emphasize with bailouts for both mortgages and banks:
    1. They encourage people to expect and depend on bailouts in the future.
    2. They make it harder on the new guys. Houses sell for more so that fewer people can buy them. Risk-taking banks that survive on welfare (not just the bailouts, but the ability to borrow at close to 0%) make it hard for newer, better run banks from starting up.

    • elrod

      1. It depends on if life is still miserable for these folks. If their credit rating is ruined than they are still suffering the consequences. The bailouts only help to stanch some of the bleeding – and prevent it from spilling over.

      2. That’s a problem unrelated to bailouts. No bank is lending much these days – big or small, better run or not – because of the overall financial crisis and exposure to unpredictable risk.

  • DLS

    “now the federal government seems poised to move on a plan to bail out many other homeowners who did not exercise such prudence”

    Of course. Give lenders the Chavez treatment, and buy-a-vote, buy-a-vote. Lots of cheap votes and voters.

  • DLS

    China probably has some feelings toward the USA and the rest of the West that are similar.

    Germany has such feelings toward worse-behavior EU nations such as Greece.

    What of our future, where we have some who want DC to spend us all into oblivion?

    Here’s a hint:

    http://www.imf.org/external/pubs/ft/survey/so/2010/NEW032610B.htm

  • DdW

    This is one issue, I am ambivalent about.

    Perhaps because I have not given it a lot of thought, yet. But, there are always “two sides to the story”. Here’s one by Howard Glaser (probably a “bleeding heart liberal”?):

    With the administration ramping up efforts to avoid a renewed housing death spiral, some people will argue that the plan rewards risky behavior and sends the wrong message to borrowers who pay their mortgages on time.

    The opposite is true: the effort directly protects those borrowers and the hard earned equity they have put into their homes

    Before immediately jumping on the keyboard, please read more here (At that” liberal rag”) :

    http://www.huffingtonpost.com/howard-glaser/no-moral-hazard-in-obamas_b_514012.htmlae

  • DLS

    “the crown, the government, the nobility, the landed gentry and the corporations ”

    At least this is (nominally) diverse, still, rather than openly consolidated under the Democratic Party.

  • ksb43

    Conservative philosophy: In a crisis, cut off your nose to spite your face.

    There. That should help.

    • Dr J

      Conservative philosophy: In a crisis, cut off your nose to spite your face.

      Liberal philosophy: repeal the Reaganesque laws allowing big-nosed citizens to keep theirs, and require them to “give back” to the noseless.

  • sandraallen27

    Contact me for a free home and flood insurance coverage quote http://bit.ly/ajc5p7

  • adelinesdad

    So, it seems to me that there are 2 main defenses for this policy:

    1) Some argue that the policy will actually help homeowners like Jazz and Robin because it will prevent their home values from falling further. If so, then we should talk about whether it is feasible for the government to really prop up home values over the long term through a policy such as this. I understand that foreclosures are bad for home values over the short term, but can we really say that home prices 5 or 10 years from now will be higher because of this policy? If we can’t say that with a reasonable degree of confidence, then it really doesn’t help homeowners like Jazz and Robin, does it?

    2) The second argument is that even though it’s not “fair”, we have to do it to prevent home prices falling even further. Really, this is just a restatement of the first argument. The reason we care about home prices falling further is because it hurts people like Jazz and Robin (and the banks, of course, but… yeah). So again, if we can’t show how this policy will help boost home values over the long term (not just the short term), I don’t yet buy the argument.

    So, here’s my question. Let’s say a home goes into foreclosure and the bank has to sell it for a bargain. Someone comes along and buys it eventually (because it’s priced to sell). 5 years later, after we’re past the housing bubble crises, is the home worth more or less than it would be if the original home owner had stayed in it? What about the neighboring homes? Perhaps you could make an argument about price inertia, but it seems to me that the value of a thing has to do with how much people want it now, not how much they wanted it 5 years ago.

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