Sunday, November 16, 2008

the unnecessary bailout

I was watching This Week in Northern California on KQED this morning, and Carolyn Said of the San Francisco Chronicle was echoing a theme that I seem to hear everywhere: an implied link between the increasing number of foreclosures and the fact that many people are owing more on their mortgage than their house is actually worth.

"Meanwhile, California led the nation in the number of foreclosures in October. Recent surveys show that hundreds of thousands of Bay Area homeowners owe more on their mortgages than their homes are worth. In response to the growing crisis, a number of key financial institutions including Citibank have pledged to put a temporary moratorium on foreclosures and rapidly rewrite loans."

The idea that somehow the state or federal government should be helping all the people whose homes are now worth less than what they owe is preposterous. The problem occurs when people can no longer afford to make their monthly mortgage payments ; this is completely unrelated to the current value of the home. The amount of the monthly payment was determined using the value of the home at the time of purchase, the length of the loan and the initial interest rate offered.

We (the government) have limited means of spending in the current economical climate, and this money should be spent wisely and parsimoniously. That means help should first go to those owners facing foreclosures, unable to meet the terms of their mortgage payments, either because they have lost a job and/or are unable to face a hike in their interest rate and are also unable to sell the house. If any plan is to be introduced to allow people to renegotiate their interest rate or payment schedule in order to reduce their monthly payment, it needs to be targeted towards those people first.

The millions of homeowners still able to pay their mortgage payments, even if their house has gone down in value below their purchase price, just have to ride it out like you do during any crisis. They might not like the idea of their investment being completely in the tank, but that is a risk that everybody takes and is not threatening the economy.

I've never heard anybody calling for a plan to help people whose stock portfolio is worth less than what they paid for it, and this should be no different.

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