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?
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.
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.