Monday, August 09, 2010

Mortgage Forgiveness

It seems that the internet is exploring a rumor that came out last week that the Obama administration was thinking about giving Wall Street a bailout, to forgive portions of mortgages that are underwater. It's no secret that Fannie Mae and Freddie Mac hold toxic mortgages, worth more than the value of the assets pledged.

While we might fault the Bush Administration for our financial troubles, (and indeed, it's fashionable to do so in some circles) there is plenty of blame to spread around. It seems to go back all the way to the Carter administration when lenders were accused of racism because urban blacks weren't able to get mortgages at the same percentages of white applicants.

Bad mortgages are bad business and holding toxic paper is something that no one wants to do. Yet, bailing out people who knew full well what they were doing when the papers were signed is no way to put the economy back on the right track. Both the lenders and the borrowers share in this mess and getting out should be painful.

A recent Rasmussen poll shows that many voters don't think that a government forgiveness of mortgages is a good idea. I don't think it's a good idea, either. This would send the wrong signal and reinforce behavior that got us in this mess in the first place.

A better idea (though still horrible) would be to forgive mortgages that are current and have been current for the past 12 months. Those folks know how to manage money and would immediately pump most of that money back into the economy.

Either way, they're both bad ideas. The country can't afford to spend good money after bad. The country can't afford to bail-out people who made bad investments.


Hal (GT) said...

I think it's a total rumor with no possibility of happening. The people in DC know it would enrage a greater number of mortgage holders who are paying on the mortgages.

I'm not sure who floated it or why but it looks more like a slight of hand thing to make us look away from what is actually being done.

Old NFO said...

Freddie/Fanny got another $2B today apparently...

Termite said...

I have an idea: take the federal government out of the mortage underwriting business. If the bank loan officers knew that their bank would "eat" the loan if it defaulted, they would be a lot more careful who they loaned money to.
That said, I do find it interesting that apparantly VA insured mortgages are far more likely to be repaid than Freddie and Fannie insured mortgages.