Tuesday, March 3, 2009

Who Needs a Foreclosure Bailout?

We hear quite often from Obama how vital it is to save people affected by foreclosures, and how we must chip in to pay their mortgages. According to him, the drama is caused by the falling house prices, and his plans are trying to accommodate that. But let's see who really needs this bailout, and how it should be done.

First of all, most homeowners who live in their houses are not affected in any way by falling house prices. Variability in the market price has no impact on a family's ability to pay, since the monthly payment stays the same. Of course, they might feel bad because the "investment" is worth less now, but the falling prices don't matter until the family decides to sell. And of course, there's little reason to sell now. These homeowners aren't more entitled to a bailout than people who lost money on their 401k's due to market losses.

Falling prices only matter when someone wants to sell the house. The main reason someone would want to do that is if they bought an over-priced house that they knew they can't afford to pay, only thinking it would be a good investment because the prices are going up and if something happens they can sell and get the cash. Also those who bought to flip the house and re-sell at a profit. These are investors who just bought the bad investment. Do you really need to rescue them? I see no reason. Again, no more reason than we need to rescue people who bought stocks whose prices have fallen. Risk is inherent in any investment, and reducing risks would only result in inflated prices and higher costs to be paid by responsible people who made good investments.

There is one more category of homeowners in trouble, and that's people who can't afford to pay because they lost their job. But in this case, again, the decline in home prices doesn't affect the ability to pay. It's the loss of income from the job that creates the crisis. And for those people, modifying loans and reducing monthly payments doesn't help at all. When you earn $0 income, paying $1,200/month or $1,500/month is pretty much the same. The only thing you can do to really help those homeowners is to help create jobs. And Government can do this only by creating a better business environment, through less costly regulations and especially lower corporate taxes.

So I'm still curious about how is Obama's plan going to help and, more importantly, whom?

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