Entire Housing Market bracing for defaults
Right now we have thousands of homeowners who have loans that they can't afford. Many of them signed for loans and knew at the time that they couldn't afford them but they were persuaded to accept them thinking they would either "figure" something out later, earn more income to deal with it, or they didn't contemplate the future at all. Some people probably assumed they could always sell their home at any time, make a profit, and then start over.
On the lender side, we had businesses and investors who lowered standards to offer loans to people who were incredibly risky. On the one hand,they were celebrated as democratizing credit. On the other hand, these mortgage companies were being "too creative" in finding ways to make financial situations fit the possibilities. There were loans where the borrower only paid the interest back without any principal repayment. Other loans had an enticing teaser rate that offered payments the borrower could afford for a short time. There was always the idea that the homeowner could refinance after an initial period and before any dramatic rise in payments were due.
The above shows the excesses that can occur in a market with a mix of optimistic thinking, questionable business practices, irresponsible planning and decision-making consumers, and lax Government oversight.
The question now is what is the right thing to do?
The recent Housing Bill established provisions to help some of the struggling homeowners. Whether that is the extent of the government involvement or just the first step depends on our view of morality.
Should we allow people who made bad decisions to benefit from them, by helping ultimately make the consequences good for them?
Won't these bailouts encourage other people in other areas to take poor risks because they can later petition the government for aid?
My answer is that the troubled Housing Market Sector is too big to fail. Similar to a large corporation in an otherwise downtrodden area, the jobs themselves become more important than the product that is produced.
Therefore, we should see how the latest Housing Bill works, and be ready to increase the aid so that we avert a crisis of foreclosures and defaults throughout the economy.
I don't think the "moral hazard" danger is that real because no one can anticipate when a problem will be so large as to require a bailout. Therefore, people will not readily go
out and make poor decisions with an eye towards having the government or someone else pay if they lose.
We should be proud that we had a Democratic Majority because otherwise I don't think anything would have been done to address the housing crisis.
It is easier to tell what is wrong with politics, but this is one of many big examples that shows what is right.