The Challenge of Righting Wrongs

The recently announced $20 billion bank mortgage settlement will help several million people, providing a little bit of cash to those who lost homes and reducing loan amounts and interest for those still in their homes. While undoubtedly much appreciated by the recipients and a great election year headline, the program illustrates the challenges of many government efforts to right wrongs.

We talk about the impact of the housing bubble, but whom did it actually impact? The bubble started in about 2001. If you bought your home before 2001 and still own it, then the bubble didn’t really affect you. The value of your home shot up during the bubble, and came back down after the bubble, but your finances weren’t really impacted. If anything, the bubble helped you a little by driving down interest rates and allowing you to save money by refinancing.

Unless of course, when you re-financed you also tapped into the higher appraised value of your home and increased your loan amount. In this case when the bubble burst you might have been left with a mortgage that was more than the value of the home. Should you be eligible for loan modification? Yes, your house might be underwater, but on the other hand the bank actually wrote you a check – you got to put the cash from the bigger mortgage in your pocket.

What if you bought a house at the peak of the bubble? When the bubble burst, your home was worth less than you paid for it, and less than your mortgage. Should only people who bought their houses during the bubble be eligible for the loan modification? But most people who bought homes during the bubble also sold homes during the bubble, also at an inflated value. Should we limit their participation in the loan reduction program to the difference in price between their previous home and current home? Should we limit participation to just first time buyers?

Its easy to talk about bankers preying on people by getting them to buy ever more expensive homes at inflated values until the bubble collapsed and left them underwater on their mortgages. But many of the people that were harmed by the bubble often benefitted from it as well, in the form of larger houses, lines of credit used to buy boats and finance vacation homes, second mortgages used to buy additional properties. It’s likely that many of the people that benefit from the mortgage program will be those that did foolish things to start with. It will be interesting to see how the government decides who deserves to be helped.

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