Note to Editors: Vickie Bajtelsmit is a finance professor in the Colorado State University College of Business and the author of three personal finance books.
In the last two weeks, President Obama has spoken publicly about his recovery plan. I’ve heard a lot of grumbling recently about the $75 billion earmarked to help households avoid impending foreclosures. The plan is to cut monthly payments or mortgage balances to make them more affordable.
Even if you’re not in danger of foreclosure, don’t you wish you could get in on that deal too?
Unfortunately, the "good guys" don’t get any of the money. You’re out of luck if you didn’t borrow more than you could afford. If you paid attention to the warnings in loan disclosure documents about ARM mortgage rates increasing mortgage payments. If you kept current on mortgage payments even when you had to skimp elsewhere.
Of course, not everyone who is facing foreclosure or upside down in their mortgage has been guilty of financial irresponsibility. Job loss, investment declines, and health issues are undoubtedly behind some of the 4 million homeowners on the verge of foreclosure.
But you can’t convince me that there aren’t a substantial number who are in trouble simply because they borrowed too much. And people who get used to spending and borrowing are not going to be able to quit cold turkey. Many experts believe that we will merely be putting off the foreclosures rather than preventing them.
As you can probably guess, I don’t have much sympathy for people who dig themselves a hole and then complain that they are in the hole. In general, US households had far too much debt and too little saving, even before the decimation of retirement accounts in the last year.
So why are these overextended people going to get a handout when the "good guys" are not? I chalk it up to two primary factors. First, there truly isn’t enough money to give everyone the same deal.
Second, and more importantly, allowing those homes to go into foreclosure would have negative impacts on everyone. What happens to the value of your home when the houses on either side of you are taken over by banks? What happens to your local bank when it loses money on a significant proportion of its loan portfolio? What happens to a town when lots of houses and businesses are empty?
Calling this the "Homeowner Stability Initiative" is very appropriate because its real purpose is to keep all home values stable, not just the ones who are facing foreclosure. This is an effort by President Obama and the Congress to give the economy a little more breathing room. Even if some of those who get better terms on their mortgages end up in foreclosure anyway, others may be able to get back on their feet financially, reducing the negative impact on home values and related businesses. If it works, we’ll avoid a major collapse in real estate values and that will be to everyone’s benefit.
I’ll admit that understanding this doesn’t make it that much easier to swallow. I’d still like to reduce my mortgage balance or have a lower monthly payment. Do you think it would make a different if I promised to spend any mortgage payment savings as my contribution to the economic stimulus?