Monday, January 21, 2008

The Big Economic Issues (2): Mortgages

The mortgage meltdown is a huge issue in today's economy. Investment money is tied up in homes with the expectation of a steady revenue stream over some 30 years. That revenue is funding other investment, including paying the mortgages or rent of retired individual small investors, as well as their groceries.

Stop that revenue stream and the result reaches the corner retailer in short order. Translation: Less spending, which leads right back to "the R-word".

My first thought about the mortgage crisis has to do with personal responsibility. This takes two forks: 1. People bought more than they could afford, hoping (not planning) to be able to afford the payments which lay in the future. Why should these spendthrifts be bailed out? 2. The lenders knew what they were doing. Could they not contain their greed long enough to lend responsibly, i.e. to people who were good credit risks (which by definition anyone who is borrowing more than s/he can afford is not)?

But the bigger picture is the effect on the overall economy, and on the individual investors whose money was mismanaged by the lenders and who had little or no say in the matter. Not only do these investors have a need (and maybe a right) to be protected, it's good for the economy to protect them. Also needing and deserving protection are the homeowners whose property values are being undermined by the meltdown, even though they have reasonable mortgages or they own free and clear.

But even more than the housing market itself, the real issue here is the effect on the overall economy. People who are losing their homes and their credit are not going to be spending in the retail area or buying big-ticket items. Homeowners not involved but affected are going to be worried, and therefore cautious with their spending. Investors losing or in fear of losing their investments are going to be holding back all they can. Those of us remaining, hearing the news of a financial crisis, are going to rethink buying on credit and are going to reign in our spending. All that adds up to "the R-word".

Therefore, though it goes against my sense of justice and my belief in minimal government interference in the economy, I think a mortgage "bail-out", in the form of "just to get you over the hump", is not only a good idea, but a necessary one. Perhaps this could be something on the order of a federal mortgage guarantee for maybe about five years, coupled with a mandatory refinancing arrangement which would delay the increased payments for a year or two, maybe by extending the mortgage. (This would apply only to those who are currently in trouble and apply for the assistance.)

Of course, the borrowers would end up paying at least as much, probably a good bit more, over the term of the loan. But I think that's small price to pay to keep your home and credit rating. Besides, the borrowers got themselves into this.

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