Moral-Economy and the Housing Bailout

David Brooks makes a fundamental point concerning the current rage for bailout politics:

Our moral and economic system is based on individual responsibility. It’s based on the idea that people have to live with the consequences of their decisions. This makes them more careful deciders. This means that society tends toward justice — people get what they deserve as much as possible ...

That pretty much sums up my own feelings, and I'm facing some potentially wrenching personal economic change later this year, when I look to negotiate new terms with my mortgage banker, or failing that, to sell my home. Whatever I do, I'm not asking for any "bailout," and I'll accept the consequences of my own financial decisions regarding the purchase of my house.

In any case, the Los Angeles Times has a good piece on folks on both side of the debate, in Long Beach, where I teach: "Housing Relief Becomes a Fence Between Neighbors":

Ledeen Halloran and Harry Snegg live a few houses apart on Claiborne Drive in Long Beach. They both have good jobs, they both voted for John McCain -- and they both have seen their home values fall more than 40%.

But when it comes to their views on mortgage relief, these two neighbors are on different sides of the street.

Halloran, 50, is a fan of President Obama's new plan to stave off foreclosures and thinks it could provide the cushion she needs to stay in her home.

"These bad mortgages started this whole recession, and if they don't do something about it we can't turn things around," she said.

Snegg, 62, thinks the $75-billion plan amounts to a taxpayer-funded bailout for people who either couldn't manage their money or took a gamble to score easy winnings in the real estate boom.

"People should get some help, but I don't think I should have to pay for it," Snegg said.

Halloran and Snegg represent a debate that is happening across the country, although the two neighbors say they mostly keep their views to themselves.

Snegg, who is divorced, worries that talking too negatively about people who are hurting isn't very neighborly. Halloran, also divorced, said she hadn't told her mother or her friends that she was having trouble with her mortgage.

Halloran moved into the Bixby Knolls neighborhood of 1940s-era homes in 1996. In 2006, she was thinking about selling and moving to the East Coast, to be closer to her son's college. So she refinanced her 30-year fixed-rate mortgage, shifting to an adjustable rate loan and tapping some of her equity to pay for renovations.

A few months later, she borrowed against her house again to pay for more home upgrades and to cover her son's tuition.

There was one hitch, however: Her loan had an option that allowed her to pay the interest only, but when she did, the unpaid principal was added to her balance. Now her mortgage exceeds the value of her home by about $150,000, and her $3,400-a-month payment is more than an entire two-week paycheck.

"I cut out coffee. I cut out movies. I cut out all kinds of things I was buying at the grocery store," Halloran said. "But when my property tax comes due in March, I'm probably not going to be able to pay."

Gone are thoughts of selling the home, and she worries that by this summer she will fall behind on her payments and lose it to the bank.

Halloran blames herself for spending money she did not have, but she also says her mortgage broker and the bank that gave her the loan -- the now failed Downey Savings & Loan in Newport Beach -- promised lower payments. The loan documents she signed show an initial payment of $2,900 a month. Her first bill was for $4,200 a month.

"We shouldn't get help for free," Halloran said. "There should be some penalty to the homeowner, but without some help, there are going to be a lot more people losing their homes."

Officials at U.S. Bancorp, which now owns Downey, said they could not comment on Halloran's loan.

A few houses down, Snegg says he knows full well the pain of foreclosure: He went through it himself in 1995.

At that time, he said, a downturn in the economy forced his advertising firm into bankruptcy. He tried to refinance his loan but, with home values sinking, could not secure a new loan with better terms.

So when he bought his current home in 2001, Snegg said he decided to play it safe. He took out a 30-year mortgage at an interest rate of 6.5% and resisted the urge to refinance at a lower rate, avoiding the associated fees.

"Interest rates are so low I sometimes feel foolish for not refinancing," he said.

He said he doesn't want people like Halloran to be forced out of their homes, but he also doesn't want to see his taxes raised in the future to cover the expanding government debt.

"I feel for people who are having trouble," Snegg said. "I've been there. And when I was in foreclosure, there were no government bailouts."

Snegg thinks that banks that have received taxpayer dollars through the Troubled Asset Relief Plan should use some of that money to help people like Halloranby granting easier payment terms.

But having the government take the extra step of actually giving banks more money to help Halloran cover her payments seems too far, he said.

There's more at the link.

I'll be writing more about this stuff as the months go by, but see my earlier post from this morning, "Perverse Incentives in Obama's Housing Plan."

Also, see Jill at Brilliant at Breakfast, where after noting she scrimped and saved and budgeted to buy a house, we have this:

The larger picture is not "Where's my government handout?", but what the consequences are of letting millions of people be foreclosed out of their houses. What happens to a neighborhood when a third, or half, of your neighbors are forced out of their houses, which then fall into disrepair? What good is your gourmet kitchen going to do you when the house next door is boarded up after vandals come in and strip it of all the copper piping? The reality is that the age of "I got mine and fuck you" is over. The days of looking over one's shoulder to make sure that scapegoat-of-choice doesn't get a piece of the action are over. Like it or not, we are all in this mess together.

So, now we should socialize responsibility? I doubt that's the American way.