Record numbers of foreclosures are affecting millions of American citizens today. The problem has become such an epidemic that the government has begun paying banks to work out mortgages and avoid foreclosing. As a taxpayer, it is important to understand what the government is really paying for and if its really something to support.
Mortgage Modification Pros
Mortgage modification provides numerous benefits to homeowners. Foreclosures negatively affect property values, so homeowners in the neighborhood benefit when a house avoids the process. Besides benefiting from higher market prices for their homes, they also don’t suffer the negative externalities foreclosures often bring: crime, trash, disrepair, etc.
Promoting homeownership and supporting the nation’s people in their time of need should also be considered. For many households, all of their positive net worth is tied up in their home. It provides a vehicle that forces consumers to save and could even provide a nice nest egg for retirement. It can be argued that this should not be the case, but for many homeowners it is a reality.
Homeownership also has positive externalities, as well. People who own their homes tend to take better care of their property and get more involved in their neighborhood. This means better schools, less crime and a generally nicer neighborhood. In some areas, modifying mortgages is the only thing that keeps neighborhoods intact.
Mortgage Modification Cons
Anyone that has chosen not to be a homeowner must now bear the burden of homeownership without getting any of the benefits. Many modifications allow homeowners to live in homes at a cost below renting. Furthermore, many people, homeowners included, will argue that the government should not reward those people that mismanaged their finances.
There are far too many examples of people living in $500k+ homes and earning $30k per year. Even if banks were willing to give that person a loan, the person should have known better. Too many times people pass the buck onto someone else when they make poor decisions.
If society continues to bail people out, how will people understand the consequences of taking risks? Homeownership is the same as investing in a very expensive asset. Like any other investment, it has the ability to go up in value and go down in value. The homeowner is the one to blame if they do not understand the risks. If they choose to sign their name on a dotted line and hand over thousands of dollars without doing their homework, why should the fiscally responsible suffer?
Society does itself a disservice by allowing its citizens to avoid paying the price for bad decisions. Using hardworking people’s money to reward bad decisions rewards all the wrong people. It directly rewards the banks that made bad loans and it indirectly rewards homeowners that did not do their homework before investing in a bad asset.
Mortgage Modification Summary
Promoting homeownership certainly has benefits. Ownership helps people connect more with their community and adds tremendous value to the neighborhood. However, when homeownership becomes more about trading up every two years to outrun mounting debt, all parties should suffer the consequences of their actions. If a modification makes business sense to a bank, then they should be free to pursue that option. To take taxpayer money and bail out banks and homeowners that made bad decisions should not be considered lightly. In the end, what does that really teach society?
Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
