Published: April 18, 2008 04:32 pm            

It's unfair, but ... — 04/21/08

Bailout is better than alternative

The housing bailout bill that has been approved by the U.S. Senate and is about to clear the House of Representatives is unfair. It rewards those people who are facing foreclosure because they purchased homes costing more than they could afford. At the same time, the Senate bill gives a $7,000 tax break to the buyer of a foreclosed home, giving the bank that is selling it an advantage over the person who has kept his mortgage payments up to date but simply wants to move.

Meanwhile, the Senate bill gives nothing to the responsible homeowner who has sometimes worked two jobs in order to make his monthly mortgage payment — or to the lenders who were careful about whom they lent to.

Yet, despite its unfairness, the mortgage bailout bill is better than the alternative, which is to do nothing. That almost certainly would lead to more foreclosures and send the economy deeper into recession.

The biggest piece of the final bailout package is likely to be $300 billion for the Federal Housing Administration to underwrite refinanced mortgages. The mortgage companies would take a loss on the existing loan but not as much as if the house went into foreclosure. The homeowners, in turn, would have to demonstrate they can keep up with the new payments on the refinanced loan. The danger is that the taxpayers might find themselves on the hook for the loan companies’ worst performing loans.

A proposal that would allow bankruptcy judges to rewrite the terms of mortgage agreements is dead in the water. That’s as it should be. It’s not the government’s job to rewrite voluntary contractual agreements.

        

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