Its time for homeowners to take responsibility for their actions

Representative Barney Frank was quoted in the Wall Street Journal today (9/23) as saying:

“I just think it’s inconceivable that people would say that the taxpayers should put some money at risk because of bad decisions made by people who then continue to be rewarded without any restrictions and, in fact, would be rewarded for their mistakes,”

While he was referring to financial executives this logic also applies to the individual homeowners when considering the “bailout” and “mortgage relief”.  It is wrong to have taxpayer money going to reward, without any restrictions,  the bad financial decisions of corporate executives or our neighbors. We have to remember that a large percentage of loans that are currently going bad were due to voluntary cash-out refinancings and NOT new mortgage originations.

According to RealtyTimes in 2006 (the peak of the bubble) 80% of all refinancings involved taking extra cash out against the growth in home equity to pay down consumer debt.  In short many of the people the government is trying to help with the “mortgage relief” plan are those who endangered their homes because of their consumer debt.  Without that consumer debt they would not have refinanced and would have had an equity cushion to protect them in this type of market.

The net effect is the currently contemplated home-owner bailout is going in a large part (indirectly) to paying down consumer debt and rewarding consumers for profligate spending.   Is that a proper use of taxpayer money?  Not according to Mr. Frank

So back to Mr. Frank’s quote.  What should those restrictions on homeowners be?

• Raise loan standards to pre-bubble norms (e.g. stringent payment/income ratios, down payment minimums, loan documentation)
• Limit loans/refinancings/modifications/relief to people that meet those proper standards.
• Offer loans based on current house appraisal prices and at standard market (NON-subsidized) mortgage rates.

There is no objective/reliable way to determine who deserves help and who doesn’t (did you lie on your app? were you lied to? blow your equity on a new car?) so why not just use the proper standard consistently as that would be fair, logical, and not reward people for their mistakes. If you cannot meet the standard there is NO REASON why you should keep your house otherwise we are doomed to repeat this over-and-over again.

Its time for everyone to take their medicine (banks, financial executives and, yes Mr. Frank, even individuals). Don’t fear the falling of prices, welcome the reshuffling of assets from those that cannot afford them to those that can.  That’s how you build an engine for growth and a stable economy.

Also remember that saving a borrower who can’t meet the proper standards prevents another family who could meet those standards from buying a home and therefore prolongs this societal pain.  You are hurting as many people as you help.