Thursday, May 22, 2008

Foreclosure Bailout: Why It Won’t Work

The foreclosure bailout plans that seem to be on the tongues of everyone in Washington these days are doomed to failure. I read an interesting piece by Holman W. Jenkins, Jr. in the Wall Street Journal that I thought I’d share. He points out the number one reason why these foreclosure bailout plans won’t work is that many people don’t even want the houses anymore.

He points out that the bulk of the foreclosure problems across the country are concentrated in a few areas such as Las Vegas, Sacramento, Phoenix and southern Florida. He contends that the people who bought homes in the outlying areas of these locations were making bets on demographic trends and commute patterns that proved to be incorrect. Many of these homes are in areas that no one wants to live right now, especially considering the high price of gas. A family that may have been willing to commute 50 or 60 miles in 2004 to get to work so that they could own their own home now isn’t so willing to take on a commute like that.

In the article Jenkins, Jr. also touches on the normal issues, such as people buying more home than they could afford in the first place, and falling home prices. The arguments here are that a foreclosure bailout is going to be hard-pressed to help someone stay in a home that they couldn’t ever afford--not then and not now. With falling home prices it brings to question again why the people would want to stay in the house if they are upside-down? If their home has depreciated by 20 percent, and they put down nothing when they bought the home, where is the incentive? These people would be better served by walking away from the home renting for 7 years, saving their money, then buying another home, but this time within their means.

Then Jenkins, Jr. talks about how even if homeowners wanted to participate in the foreclosure bailout plan, it is still a losing proposition for American taxpayers. “…the government plan, which would pay 85 cents on the dollar for mortgages now selling for 50 cents or less. True, the House bill gamely seeks to exclude speculators and homeowners who lied about their incomes. But an ill-equipped FHA would be a sitting duck for lenders who tacitly permit nonpayers to remain in homes just long enough to pass the bag to government” Jenkins, Jr. Wrote.

In conclusion Jenkins, Jr. says that that the housing problems going on right now aren’t the end of the world; we will survive. Most importantly he ends his article by saying, “One sure way to guarantee bubbles without end is to institutionalize that one-way bet. That's what a bailout would end up doing for those ultimately responsible for directing a large chunk of the nation's savings into unwanted, uneconomic housing.”

Personally, I couldn’t agree more. If we always come to the rescue of people who do dumb things, they will never learn. I think it is time to make the people who made poor decisions pay for their mistakes, learn from them and become better for it. In business and in life, this is how you improve: You try something and if it doesn’t work, you do it differently next time. The only lesson we are teaching people now is that if you screw up, no biggie--the government will bail you out, so feel free to take some extra risks. But if people suffer no consequences from their poor choices, they will never learn.

Labels: , ,

Subscribe to NuWire's free weekly investment newsletter:
  
Your information will not be shared

0 comments:

Post a Comment

Home

© 2013 NuWire Investor and NuWire, Inc. All Rights Reserved.