How Far Should Your Sympathies Go?

Over the past few months, the press has deluged Americans with weepy stories about people who are in danger of losing their houses because their sub-prime mortgages now exceed the value of their houses, which the recession and the popping of housing bubbles have caused to drop.

I am sympathetic; and I, and other taxpayers, am being asked to provide relief in one form or another. People who bought houses whose basic value far exceeded what they might reasonably have expected are now expecting other taxpayers to bail them out; and the expectations will probably be satisfied.

But what if one poses the issue in reverse: Would taxpayers be willing to put tax dollars into a program that would buy single-family houses that are larger and more valuable than would be consistent with usual standards of prudence in mortgage lending? I strongly doubt it.

Implicitly, proponents of homeowners’ bail-outs are relying on what one might call a “second-hand endowment effect.” We are supposed to offer money in sympathy with others’ losses (not of life, merely of property), whereas we wouldn’t offer money out of sympathy to provide them gains. Similar second-hand endowment effects exist, I believe, toward a variety of existing and proposed government programs to “help” citizens.

(Hat tip: DJH)


Allen Reynolds

No, no, no! I am sympathetic, even to those fools who bought in to the height of the bubble. But the action from my sympathy is to reduce the long-term suffering. If we bail out people now, we face a moral hazard and will end up with more people in the same boat later.

No bailouts, for anyone, ever. It's the only compassionate response.

Mike

We should have no sympathy for those who are unable to live within their means. The home I purchased is almost certainly down in value since I purchased it, but I am able to comfortably pay the mortgage along with all my other bills (as well as enough for me to afford the things I love to do), despite having taken a very substantial paycut.

Whatever happened to hope for the best, plan for the worst?

Paul

What about the $15,000 tax credit for homebuyers in the stimulus bill?

Ian

Are some people walking away from their mortgages that are quite capable of making ends meet? The benefits of jumping ship on a negative equity situation are too high versus the costs.

Credit is still to easy to get. Have no lessons been learned?

Gavin Andresen

I bet the average homeowner supports a housing bailout mainly because they don't want the price of THEIR home to fall any further.

Renters who support a housing bailout (do renters support a housing bailout?) would be the ones suffering from a second-hand endowment effect.

C. Larity

If homes are truly valued by how much utility a person receives from a home, why would a decrease in the perceived dollar value of their home (i.e. going "underwater" on their loan) affect their willingness to continue paying their mortgage? Just because an mp3 player goes on sale for $10 less a month after I bought it, I don't appreciate the mp3 player less.

As for those who took variable-rate loans, particularly loans with teaser rates, they took a risk and got burned (assuming the risks and conditions were adequately described by the lenders, which I admit is probably not always the case). Would they be afforded sympathy if they'd lost money in the stock market?

Steven Surowiec

I agree in that there should be absolutely no bailouts for anyone. I think the real underlying issue is that we've become such a welfare state that everyone expects the federal government to come running with cash in-hand any time they're in trouble for anything.

Matthew R.

People who are sympathetic are welcome to open their own wallets, and not pickpocket mine. Be as sympathetic as you want with YOUR OWN money.

Zach

Really? This seems awfully close to the common shortsightedness of "everyone for yourself" economic thinking. If those people who made bad decisions (and those people who were manipulated into making bad decisions) all lose their houses and/or go even deeper into debt, are we all better off? Surely bad decisions shouldn't be rewarded--but if enough people make bad decisions and go down, they'll bring us all down with them.

Tom

I didn't buy a house during the bubble, not because I couldn't qualify for a mortgage, but because I thought that housing shouldn't consume 50% of my income. I thought the prices were too high so I continued to rent despite the tax advantages to paying mortgage interest.

These programs designed to keep the reckless in their homes are just wrong. I believe they are just as wrong as the initial decision to allocate 50% of their income to mortgage payments in the hope that in one year people would be willing to spend 75% of their income to buy the same house.

I don't think I should be punished by a government that I have been paying a boat load of taxes (see lack of tax deduction above) because they want keep housing artificially high.

There. I said it. Who do you want to feel sorry for: the reckless prodigal or the good prudent son?

Biggman

Zack, Your "those people who were manipulated into making bad decisions" comment speaks volumes. Your "victim" mentality highlights the lack of personal responsibility and general narcissim - so pervasive and damaging in today's society.

Blair H.

I think the most confounding part of finance for me right now, is that the people who most need to refinance are those who are underwater. They are also the people who can not do so. Bizarrely, I suspect that if people were allowed to refinance the existing debt at the new lower interest rates, regardless of the current value of the asset, it would drastically increase the likelihood of repayment. Not allowing these individuals to find more affordable financing seems likely to perpetuate the crisis.

Despite my statements above, I fundamentally understand why these assets fail to meet good lending criteria. However, I can't help but be somewhat astounded that it isn't considered a greater good to allow an underwater refinance and increase the chance of repayment, especially if borrowers are steered away from dangerous loans.

My sympathies mainly extend towards people who bought somewhat responsibly, but have been hurt by the market downturn. In some markets it is impossible to avoid the price downturns.

I don't support a bailout in the form of cram downs as that seems like a reward. Though I find it interesting that you can do that with investment property.

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Rogue Medic

While the mortgage brokers probably engaged in a lot of misrepresentation, the way to handle crime is to arrest the criminal. It is unfortunate that the crime victim often loses the monetary value of their property.

If your accountant embezzles from you, you may be out your money. If the embezzler did not pay your taxes out of the money embezzled, and why would they, you would still owe taxes on the money you never received. Yes, you should have read the fine print on anything you signed, but the government doesn't try to protect people from those losses.

As a renter, where is my bailout? If the government is subsidizing home prices, they are keeping home prices out of the reach many people.

When the current appeal of Treasuries wears off, what will happen as those prices drop? High Treasury prices mean low interest rates. When Treasury prices start to drop, as in the the Treasury bubble starts deflating, won't there be a flight to quality? When nobody has faith in the US government's ability to repay, or they have no desire to be repaid in US dollars, how will that benefit anybody in the US?

I have always wanted to be able to be a millionaire, or a billionaire. When it is only because of excessive inflation, there is no real improvement in worth.

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KB

Many individuals made decisions, that were, at the time, good for the individual, however, in the long run have proven bad for society in general.

Society must on some level help these individuals out because it will be help society to do so.

What program will do this without inducing individuals to make similar decisions in the future?

Jake

Fund bulldozers. Then we can use them on the underutilized new developments to reduce excess supply.

HillbillySid

Wow, I hope I'm never in a bad spot with this crowd around. Yes, many homeowners made dumb mistakes and will have to face the consequences of those mistakes but to say no bailouts ever for anyone and then to deride those in foreclosure is rather cruel and as one poster put it, shortsighted. I would much rather help keep my neighbor in their home than to help a CEO go live it up in the Bahamas for a week.

Tyler

I'm not sure of the wording/nature of the bailout (is anyone?) but I wouldn't at all be opposed to my tax dollars going toward buying distressed mortgages that would be resold at a more manageable rate. The subprime/predatory lending debacle was a moral failure on the part of many people, not just the home buyers. Maybe the gov't should sue Ditech for $700 billion.

Tyler

@ 13, you ask "Where is my bailout?"

Don't worry, I'm sure it's coming!

thomas

You are looking at the problem wrong. It is not sympathy, that would push you to help these people. It is self interest. Every foreclosure, lowers the home values around it, causing negative feedback.

The higher the unemployment the more drain on resources there will be. Lower tax revenues, more money for welfare, lower wages for everyone.

Let's say you are a blogger for the NYTimes and an academic. When there is mass unemployment and a recession, that usually restricts advertising and government funding for colleges. That causes the NYTImes and colleges to downsize. Now you are out of a job.

cyberhiber

Buying a home is a hugely emotional decision. Just watch HGTV for a few hours to see how it teaches people that they need to live in a resort-like setting, with a 300 square foot bathroom and a separate wing for the kids. People are led to believe that this is how we need to live - to have at least as much as the Joneses.

On a single income, I provide for my family of four. We have one parent at home full time, parochial school, a comfortable mortgage in a working class suburb, two used cars with no payments, no credit card debt.

It's called being responsible...living within your means and making smart decisions with your money. It is, after all, a limited resource.

I have little sympathy for irresponsible people. They made the decision to sign the papers for a mortgage with bad terms.