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Bush Bails Out Some Americans From the Subprime Loan and Foreclosure Crisis

By Erik Folgate

Today, Bush announced a plan to freeze introductory mortgage interest rates for those homeowners that bought variable interest rate mortgages in order to qualify for a house they could not afford with conventional home loans. With all of the “scares” from economists about a possible economic recession, the spike in foreclosures around the country, and a very important presidential election less than a year away, Bush caved in and put together a plan to give relief to some Americans. I say “some” Americans because his plan will only apply to about 10 to 20% of the Americans affected by the subprime mortgage meltdown.

If you want to get a better idea of the plan and more about what I am talking about, go to this NY Times article.

When I first heard about this plan, I was angry, because I don’t think that the government should mettle in a private sector every time something goes wrong. My original position stays the same that I believe mortgage brokers, mortgage lenders, and consumers are equally responsible for the collapse in the subprime market. Consumers knew what they were getting into when they signed the dotted line. No one is stupid enough to think that they can buy a $400,000 house with little money down for such a low payment. They had to understand the risk of the rising interest rates in the future. Mortgage lenders knew exactly what they were doing, too. Their philosophy was: just grab all of the business we can during the housing boom and figure out what we did later. I don’t think they were forecasting the amount of foreclosures that we’re seeing and going to see in the future.

After thinking about it a little bit, I am still frustrated that the government is getting involved in something that the free market should be handling itself. I’m also frustrated that some people like real estate investors will be bailed out when they really did know exactly what they were getting into, and now they’ll be rewarded for their greed. However, I understand why Bush did it. I think he made a mistake, but he was under a lot of pressure to fix it, plus he didn’t want the possibility of passing the president’s torch to another Republican with a housing crisis. This was definitely more of a political move than it was a social move. It’s pretty obvious, because there a quite a few limitations to the plan including that you must be current on your payments in order to be eligible for the rate freeze. Well, that makes a lot of sense. Help the people that don’t need help. The reason they’re doing it is to stop the bleeding. The Bush administration and the Treasury are basically saying, “Okay, screw the people that are already losing their houses, but let’s make sure that the bleeding doesn’t continue to the next two or three years and ruin the economy.” This rule is also the reason why I think real estate investors will be rewarded, because they are probably a good portioon of those owners who are current on their payments. A real estate investor has no emotional tie to their property. So, they will either sell the house and take the loss, rent it out, or raise the rent if the interest rate goes up to recoup their loss. Anyway, I don’t think the government should have done anything, but I understand why they did. It just makes me scared, because it seems like the government has been able to do whatever they want lately without our consent. The American people are allowing the government to exercise more power than they may be given, and we need to take a close look at the precedent we are setting. If we let the government wave their magic wand every time something goes wrong, it gives them more power each time.

Also, this will set a bad precedent for the cyclical real estate market. Do you agree that in 10 to 15 years we will probably see another era of low interest rates and rising asking prices? When we do, many people will remember what happened today, and they’ll consciously think, “Well, the government won’t let it get out of hand if I get this big mortgage”. Another great question to ponder is where all of this lost money in interest will go. Will hedge funds and other investors who bought this debt from mortgage lenders go bankrupt or will they pass the cost off on the consumer/investor? We have to think about the other side of these types of decisions before agreeing or disagreeing with them.

What are your thoughts? Do you think this was the right move? Do you agree with Hilary Clinton that EVERYONE should have been bailed out?

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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