Bailouts Costing More than Money

Last week’s passage of the home mortgage bailout has received a fair amount of media attention. However, between the comic-book like characters involved – Fannie Mae and Freddie Mac – and the general complexity of banking and finance terms, it’s tempting to hear the news and think, “Oh good. That’s taken care of. Now … what am I making for dinner?”

The home mortgage crisis has irritated me since it first hit the news. I am no economist or finance expert but I do understand this much. The issue, at its core, is that people received loans who should not have from banks and credit agencies that should have known better.

Most of problems stemmed from the use of “ARM” (adjustable rate mortgages) loans. These tempting buggers start out with a “teaser” rate that’s typically lower than a fixed-rate loan. These low initial rates make a house seem more affordable, at first. After the initial period, however, the interest rate can fluctuate, sometimes significantly.

And that’s exactly what happened. Faced with much higher interest rates, many “subprime” borrowers (people who were not “prime” candidates for loans because of their low credit rating) can’t afford their home mortgages. The “what ifs” that these borrowers, their lenders and credit analysts should have considered before closing the sale, became not just an inconvenient detail but the cold, hard reality.

It’s an ugly situation – made worse by job losses and high prices for food, gas and other essentials.

The solution, although it promises to save up to 400,000 people from losing their homes, could be even uglier for our nation long term. Our leaders in Congress authorized the Federal Housing Administration, a.k.a. the U.S. government, a.k.a. you and me, to insure up to $300 billion in refinanced mortgages to help prevent foreclosures.

They also approved billions of future potential investments into the “quasi-private” mortgage giants Fannie Mae and Freddie Mac – entities that already receive preferential treatment from the government. Sounds like the federal government is taking another giant leap into the home loan business.

I’m not in favor of hundreds of thousands of people losing their homes. But allow me some anger and frustration when “we the people” have to spend potentially billions of dollars to compensate for lousy decisions made by financiers and borrowers who could have, should have, and I believe did, know better.

If a child had exercised such a poor decision, it would be a powerful learning opportunity. But apparently, the ramifications to our economy and our politicians in an election year are too devastating to allow anyone to seriously suffer from these bad choices.

A few in Congress issued warnings against these bold steps. Representative Jeff Flake of Arizona said during the House debate, “This bill has moral hazard written all over it. We are pretending to chain a monster here, and we are, instead, letting that monster loose.”

The monster looms in the question, if Congress, not the marketplace, is going to determine winners and losers, where do the bailouts end? Our system is based on profits and losses. The potential for loss keeps people from taking irresponsible risks.

If the government has our back, what’s stopping millions of Americans who took a more conservative (and expensive) loan from the more risky route next time?

The lopsided vote by which the measure passed in the Senate (72-13) sugarcoats the disturbing precedent this legislation creates.

Wait a minute. I guess it’s not really a new precedent. After the Bear and Stearns bail out a few months ago maybe it’s more like a trend.

Let’s hope not.