Mortgage relief program a slap in the face to some
When Casey Johnson and his wife moved to San Diego County three years ago, they couldn’t find a home in their price range. So they did what they thought was the sensible thing.
Rather than over-leverage themselves with a risky mortgage, the couple rented an apartment in La Jolla and waited patiently for the housing market to drift back to earth, hoping they hadn’t missed their chance to become homeowners.
But now the government-brokered plan unveiled Thursday by President Bush to ease terms on some sub-prime mortgages feels like a “slap in the face,” Johnson said.
Many people who prudently sat out the housing bubble -- or resisted the urge to cash out their home equity to help finance their standard of living -- share that visceral reaction. In part, they resent on principle the rush to help a segment of society that may not have acted so responsibly. But they also fear that any effort to prevent foreclosures could keep home prices from falling to an affordable level.
“I try to do the right thing, which is to have a down payment and a job and to be fiscally responsible, and it basically looks like it’s not going to pan out if this sub-prime bailout goes through,” said Johnson, a 34-year-old biologist at the Salk Institute.
Proponents of the Bush-backed plan, under which interest rates would be frozen for five years for some adjustable-rate borrowers in danger of losing their homes, say the relief effort would help unsophisticated home buyers who were misled by mortgage lenders into taking on high-risk loans. Supporters also say the program is needed to keep the housing crisis from sending the country’s economy into a recession. A vast majority of the country’s politicians appear to be in favor of the plan, with some saying it doesn’t go far enough.
But the undercurrent of antagonism to the program is strong and is lent support by an economic principle that says people tend to act more recklessly if they know they’ll be protected from the consequences. By that logic, aiding homeowners who are in trouble now will only encourage future borrowers to take on too much risk.
“Should you and I be bailing out people who lied about their incomes, bit off more than they could chew or were too lazy or ignorant to understand what kind of an obligation they were entering into?” said Michael Darda, chief economist at MKM Partners, a brokerage firm in Greenwich, Conn. “I understand there are sleazy people in the mortgage area, but what I don’t hear from politicians is: ‘Does the individual bear any responsibility for this problem?’ ”
Ed Skebe of Manhattan Beach would agree that even if some people were duped by shady mortgage brokers or loan officers, many knew they couldn’t afford the homes they bought and rolled the dice anyway in hopes that the boom had enough life left to shower them with profits.
“They hurt everyone. They drove the prices up,” said Skebe, a 61-year-old program manager at an air-freight company, who said the booming housing market prevented him from trading up to a larger home. “It’s hard for me to believe that someone didn’t realize they couldn’t afford a $600,000 home.”
The worst potential consequence, critics say, is if the government’s actions prop up a housing market that easy financing helped inflate. That, they say, would delay the eventual day of reckoning when property values finally settle at their natural levels, keeping many would-be buyers locked out of the market in the meantime.
“I’m not asking for Armageddon,” said Matthew McGuinness, a 43-year-old television writer living in Hermosa Beach. “I’m just saying, let the market go to where it should go.”
Housing and finance experts sympathize with such arguments.
“I definitely see where these people are coming from,” said Tracey Seslen, an assistant professor of finance at USC’s Marshall School of Business.
But she and others say there are no ideal public-policy options in the sub-prime crisis, and the overriding goal is to head off a sharper housing downturn that drags the economy into recession.
“The first-order objective would be to avoid a further deepening of already serious problems in housing markets,” said Stuart Gabriel, director of the Richard S. Ziman Center for Real Estate at UCLA’s Anderson School of Management. “What’s going on here is concern that this issue is big, broad and of such significant consequence that it could seriously hurt the U.S. economy.”
That’s little consolation to Johnson.
Not only could the rescue plan force him to delay his dream of homeownership, he said, but it also risks validating rampant spending and gaudy lifestyles bankrolled by free-flowing home equity.
“You see the guy making $38,000 and every weekend he’s bringing new toys into the house, a new TV or a new couch,” Johnson said. “We all end up suffering for it, whether it’s the loss of community or destruction of the environment.”