Subprime-mortgage crisis government aid…a handout? or a safety?

I was talking with some friends last night about how the government is bailing out people who “bought way more house than they could afford” on an adjustable rate mortgage. At first we were all united against it — after all, we were all responsible homeowners, watching our budgets, paying our bills on time. We were all on 30-year fixed mortgages in modest houses that we can afford. Why should these people get extra aid that we don’t? Where’s our reward for being responsible? If the government is handing out money, shouldn’t we get some too?

However, according to this article I found in the Wall Street Journal, the government isn’t so much handing out money as it’s helping people refinance their way out of a bad situation (when the banks likely wouldn’t let them otherwise).

Among the moves will be an administrative change to allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers. The change is intended to help borrowers who are at least 90 days behind in payments but still living in their homes avoid foreclosure; the guarantees help homeowners by allowing them to refinance at more favorable rates.

Mr. Bush also will ask Congress to suspend, for a limited period, an Internal Revenue Service provision that penalizes borrowers who refinance the terms of their mortgage to reduce the size of the loan or who lose their homes to foreclosure. And he will announce an initiative, to be led jointly by the Treasury and Housing and Urban Development departments, to identify people who are in danger of defaulting over the next two years and work with lenders, insurers and others to develop more favorable loan products for those borrowers.

The moves are the first visible steps the Bush administration has taken to help stem the fallout from the subprime crisis, which has roiled financial markets and threatened to contaminate the housing sector. Defaults and foreclosures are increasing as borrowers — many of whom got interest-only or no-money-down loans — begin having trouble making their mortgage payments as higher rates kick in. Many homeowners believed they could refinance their loans, but that has become much harder as lenders tighten their standards in the face of defaults and foreclosures.

With more than two million loans expected to adjust to higher rates over the next two years, possibly triggering many more defaults, the Bush administration is looking for ways to stem the damage.

“The president wants to see as many homeowners who can stay in their homes with a little help be able to stay in their homes,” a senior administration official said. “We’re not looking for an industry bailout or a Wall Street bailout. The focus here is on the homeowner.”

Mr. Bush is instructing Treasury Secretary Henry Paulson to look into the subprime problem, figure out what happened and determine whether any regulatory or policy changes are needed to prevent a recurrence.

I could have easily been one of these people had the market turned a few years earlier. When I first bought my duplex in 2003, it was on an ARM. I know several people who bought houses around that time, on ARMS, with the plan being to refinance one year later into a fixed — the equity in your house could go up substantially within a year at that time, so you’d be able to get a good rate on a 30-year fixed, even though you didn’t have a down payment. I’m safely locked in for 30 years now, but had the market turned, and I’d suddenly become upside down on my mortgage (easy to do with no down payment), I would’ve been in the same boat.

While I certainly don’t want to see people getting foreclosed on and kicked out of their homes and onto the streets. But you can be sure that letting all of these people be foreclosed on would go pretty far toward avoiding this kind of situation again.

My biggest concern in all of this, however, is that I really don’t want to see the banks “cleaning up” their lending practices. A lot of first-time homebuyers have a hard time saving up a 10% or 20% down payment. Self-employed people practically rely on no-doc loans (a.k.a. “liar loans”). I bought my house with no money down — it was a great opportunity for a carefully chosen house. Getting rid of these “questionable” lending practices does protect newbies from themselves, but will also make things harder for the people who know what they’re doing.

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