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Help for Subprime Borrowers?

Posted by: Peter Coy on March 22, 2007

At first glance, helping out subprime borrowers who are in a pinch seems like a no-brainer. How can the government stand by while people get thrown out on the street because they can’t make their mortgage payments? foreclosure.jpg
Indeed, two top Democrats have already put forth ideas. Senator Hillary Clinton, who’s running for president, wants a federally mandated “foreclosure timeout.” Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, also favors steps to protect homeowners from foreclosure.

Most economists are skeptical. They’re afraid that if government steps in to bail people out of bad decisions, it will set a dangerous precedent. Borrowers will be even more likely to throw caution to the winds the next time because they’ll be confident that they won’t have to suffer the consequences if things go wrong. In economics lingo, this is “moral hazard.” What about people who were misled by unscrupulous predatory lenders? Well, the free-market economists say, it’s too bad for them, but people won’t be so trusting next time if they see what can go wrong.

Here’s a link to an article published by the University of Pennsylvania’s Wharton School of Business that thrashes out the pros and cons of bailouts—and concludes that they’re probably a bad idea.

Reader Comments

Larry Lindsay

March 23, 2007 7:31 AM

Bailouts are just another example of how liberals in this country approach responsibility. People have to take responsibility for their actions in order for our society to work. Hard working, responsible people cannot keep funding government programs that give money to people that make bad decisions. Examples other than this issue are people that did not bother to pay for homeowners insurance in case their house blows down or is burned up in a wildfire. Also those that build, rebuild or purchase
homes or property in an area that has a high probability of being blown away by a hurricane or washed away by floods. These people made their decisions. They should have to stand by them.


March 23, 2007 10:22 AM

Actually I like the idea of bailing out homeowners. I'm not a homeowner, but I did have to pay the IRS $3000 of which I could not afford. So if homeowners get a bailout, what about someone like me who can't afford tax payments? And what about people who can't afford the rise in utilities and get their gas/electric cut off. I think the government should bail us all out.


March 23, 2007 10:31 AM

I agree with the author. Also, there is the matter of fairness: what kindness is it to those of us who made all the sacrifices needed to come up with the down payment and the subsequent monthly payments? Did we make a mistake in spending within our means?


March 23, 2007 11:18 AM

If you cannot afford a house - dont worry - the taxpayer will pick up the tab. You just go out and get what you want, as if it was an entiltement. Thats bull!! Home ownership is over 70% - highest ever. The sub-prime loans are going to affect the entire economy. The hardworking taxpayer will be the one who suffers. Where is the sympathy for the good guy who works and earns only to have his money be given away by democrat politicians trying to pander for votes. Pathetic.


March 23, 2007 5:34 PM

This idea really boils me. Why does the government (i.e., the taxpayers) have to keep bailing people out when they make mistakes? If you can't read a contract, can't do a budget, and still sign up to buy a house you can't afford, why should we have to save you? If you don't buy insurance for your house, why should we pick up the tab? Take some responsibility for your mistakes!

c carter

March 23, 2007 9:59 PM

how do the goverment bail you out of a subprime loan

Brian R.

March 23, 2007 11:09 PM

Peter, what about the consumer of Vioxx who is (at least allegedly) harmed by that product? Should the government cut a check to that person? After all, the FDA was supposed to be there to protect that person from harmful medications. What about those consumers harmed by eating spinach tainted by e. coli? Should the government give money to those individuals or to their estates? What about the innocent driver killed by a drunk driver? Here, too, the government's job includes maintaining safe highways, including keeping drunks off the road. And by the way, why hasn't the government been writing huge checks to those individuals harmed by smoking? Should not those individuals be entitled to compensation not just from the tobacco companies, but from the government as well, since it is there to protect us? What about the fellow who was abused as a youngster and then, years later, creates mayhem in society? Why didn't the the governmental social workers and psychiatrists timely and adequately treat the abused individual? Surely that fellow deserves a slice of the pie. And why would any bailout be restricted to subprime borrowers? Prime borrowers can be taken advantage of as well. In fact, those buyers who used negative amortization to get into the really big houses stand to lose even more than those poor folks in Cleveland or Philly. Finally, and perhaps most importantly, let's not forget about the buyers of the collateralized debt obligations, especially for those buyers who happen to be Saudi Arabian. Those folks have a lot of oil, and we need a lot of oil. We simply can not be seen as discriminatory in any sense. (As for me, I don't need much. All I ask for is enough seed money to start my new venture - - The Institute for Destitute Property Speculators.)


March 24, 2007 4:28 PM

There is no party to blame for the subprime situation, except the end investors. Borrowers knew they were putting no money down on their home purchases, they knew how long their payments were fixed for and that they would need to refinance after the fixed term. They took a risk that things would work out for them in two to five years. Without these loans, they would not have been able to purchase a home. The lenders knew the risks that they were taking and so did the investors in the mortgages. If the lenders and investors miscalculated potential losses, then their profits are impacted. There are very few parties that truly did not know what they were doing, including the borrowers, and most of those misinformed people were probably placed into the 1.95% Option ARM programs which are NOT even subprime loans. The markets will take care of themselves, but the government and regulation should not intervene to relieve the pains of those who took risks and may have miscalculated. If there is an insurance policy for investing decisions, I'd like to purchase one.


March 26, 2007 12:11 PM

The government is fostering a sense of entitlement by even considering a bailout. There are certain unalienable truths and freedoms to which we are entitled, one of these being to make our own choices and to live with the consequences. The government should promote personal responsibility instead of giving a free handout to those with a "do what you want; who cares" attitude.


Sharon Nevins

June 13, 2008 1:41 PM

Hello All,

I agree that the government should not bail out homeowners but they also should not have bailed out Bears and Stearns-- Let be fair here! If you can bail out the Big Business why not offer help to the little guy-- Just a thought!


February 18, 2009 9:53 AM

hmm i had poor credit and was suprised to learn that i could buy a house, it was a modest 3 bedroom to move my wife and 3 kids into, we had to put 10 percent down, and the interest rate was 8.75. the price ofthe house was 56000 i wasnt trying to go above my means, just providing my family with a life, well after the 1st year our interest rate was up to about 14 percent, and you know what i did,.... i made the payments, i worked and made the payments, know that the fed has dropped the rate, we are back down to 8.5. and you know what ill do. make the payments. i go to work my wife goes to work and we make the payments, i would like to refininace to a fixed loan, but if i cant, ill just make the payments, i will take the responsiblity, and i dont believe anyone else should have to help me pay my payments, because i had bad credit, i was at one time in foreclosure, and guess what i did, got a second job, and made the payments, sometimes people sell themselves short, dont let the goverment do for you. do for yourself, because at the end of the day, you can hold your head up and say. i did this on my own.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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