Friday, January 13, 2012

Responsible Borrowers Should not Bail out Reckless Borrowers

Addressing realtors in Nashville and Chattanooga this week, Senator Corker discussed his proposal for long-term housing reform and sharply criticized recent comments by New York Federal Reserve President William Dudley who has advocated using Fannie Mae and Freddie Mac to write down the principal on home loans where the borrower owes more than the home is worth. 

“Reducing the principal on home loans for borrowers who put no money down amounts to a massive wealth transfer from places like Tennessee, where most homeowners have borrowed responsibly, to places like California and New York, where exotic mortgages were widely used to finance a speculative housing boom,” Corker said. “It is absolutely egregious that the Federal Reserve would insert itself in this manner and ask people in Tennessee who played by the rules to bail out reckless borrowers in other parts of the country. A program like this one that reduces principal for a few million underwater borrowers would come at a substantial cost to American taxpayers and responsible borrowers everywhere.”

Senator Corker has introduced the Residential Mortgage Market Privatization and Standardization Act in an effort to start a real conversation in Washington about the need to responsibly unwind government-sponsored enterprises Fannie Mae and Freddie Mac and gradually end dependence on the government for housing finance.

I agree with Senator Corker and like Senator Corker I am a proponent of expanding homeownership opportunity.   However, there is a wrong way and a right way to do it. Irresponsible behavior should not be subsidized and encouraged. Many homeowners somehow feel they should be bailed out because their home did not increase in value or because they owe more on their home than its current value. There was never a guarantee that home values would always increase. 

Homeowners who got a conforming loan should not bail out those who got an adjustable, 80/20, negative amortization, pick-your-payment, interest-only or other type of "creative financing" product. Homeowners who bought a reasonably priced home should not bail out those who bought more home than they could afford. Those who planned for their retirement and either had their home paid for by the time they retired or had a reasonable mortgage payment they could afford on their retirement income, should not bail out those who at age 50 got a 30-year mortgage and upon retiring at age 65 can no longer afford their mortgage. Those who paid a reasonable downpayment should not bail out those who got into a home with no money down. Responsible people should not have to bail out irresponsible people.

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