Three Reasons Why a Mortgage Bailout Is a Terrible Idea

BY PAT SUMMERS

Multiple polls have shown that the majority of people are opposed to a government-led bailout of mortgage borrowers and lenders. Nevertheless, lawmakers go forging ahead, looking for new ways to bail out those irresponsible parties that created all of the problems.

The worst part is that they actually receive support and encouragement from consumer activists, lobbyists and other people who are all too happy to throw innocent taxpayers to the wolves.

This article is a plea to all of those people who think that a mortgage bailout is what is needed by this country right now and to the groups wanting to punish responsible people for their personal gain.

Three Reasons Why a Mortgage Bailout Is a Terrible Idea

1. Home Prices Should Fall

Every time a bailout is mentioned, there is a lot of talk about slowing the decline in prices. Everyone wants to keep the bubble inflated and the good times rolling. But it's time to face facts: home prices are too high and they need to come down.

Home prices in the U.S. increased 85 percent (adjusted for inflation) from 1997 through 2006, according to noted Yale economist and bubble expert Robert Shiller. Income increases were nowhere near this figure. Since mid-2006, home prices have fallen just 15 percent, leaving many potential buyers still priced out of the market.

Incomes are not going up. They are going down. In order for people to be able to afford to buy homes, prices need to come down too. It's simple math. A bailout won't change that. In fact, it could make maatters worse by delaying the inevitable correction.

2. Some Borrowers Should Be Renters

Bailout supporters argue that a bailout is needed to 'keep people in their homes.' Let's think about this for a minute. What's the point of keeping someone chained to a depreciating asset, one they really can't afford?

Data has shown that people aren't defaulting in increasing numbers because of readjusting payments. Most of the defaults occur before a reset. The fact is, that hundreds of thousands--if not millions--of people bought more house than they could afford because home prices were too high.

Giving these people a prime instead of subprime rate or fixed instead of adjustable rate isn't going to change that fact. These homeowners would be much better off getting rid of the dead weight ASAP and renting comparable homes for less money for the next few years.

3. There Should Be Consequences

A mortgage bailout that utilizes taxpayer money or any other funds that would be better spent elsewhere is just plain unethical. While there are people struggling with default because of job loss, ill health or some other tragedy, most homeowners in trouble are that way because they made poor financial decisions.

Bailing them out at the expense of others is clearly wrong. Poor financial decisions get made every day. People overspend on their credit cards, they gamble away their grocery money at the slots, they buy brand new SUVs when they should have bought used Chevettes and they spend their daycare funds on crack. Do we bail these people out? Of course not.

The same philosophy should be applied to housing. While it's true that not everyone was a speculator--some people just wanted homes for their families--they all had the chance to weigh their decisions and READ the contracts they were signing. If poor decisions were made, it shouldn't come as a surprise that there are consequences to be faced.

By the way, this 'consequence theory' also applies to all of the builders, lenders and others in the housing industry who made bad business decisions. They are the last people who should be helped by a bailout.