Should There Be A Bail Out?

I have a good deal of concern on the state of the economy and what’s been happening with the mortgage markets and the subprime loan industry.  I hope and wish for the benefit of the future that our economy comes to a gradual slow down instead of a complete bust and recession.  But an article on CNN Money recently touched a nerve that I’ve been wrestling with in this subprime mess:  Should there be a bail out of subprime borrowers and other borrowers who stretched a bit beyond their means?

Recently, Countrywide announced a program to restructure the loans of its troubled borrowers.  It provides a fixed interest rate as low as 5.25% to some of its deliquent clients as their rates shoot up to astronomical and unmanageable levels.  Whoa!  That’s currently 1-1.5% less than what you can currently get from the market.  And what about those borrowers, who 2 years ago, chose the fixed rate, slightly more expensive route?  They paid more two years ago because they had no “teaser” rate and now with these loan work outs, their rates are still higher than the 5.25%.  Never been in the penalty box, but always penalized. 

The article highlights the frustrations of folks, like me, who find this a bit unfair.  During the heyday of the housing market, when everybody around me were snatching up homes, I chose to be cautious and not get myself into a situation that didn’t seem palatable.  I made it a point to learn about how adjustable rate, interest only, negative amortization, etc.  mortgages all work.  Many articles I have read point to the fact that many of the borrowers of these type of loans didn’t understand the terms or their mortgage brokers didn’t tell them about how it really works.  As the biggest financial decision of most Americans, shouldn’t we make sure we understand the consequences and impact? 

I did.  I understood that yes, I could afford that no down payment, $800,000 mortgage for the first 2-3 years.  But after the reset, I determined there was no way my income could support my housing payment, unless I somehow miraculously won the lottery.  It’s funny how in 7th grade, my jr. high school made us repeat the line, “I am responsible for myself,” everyday for what seemed like an eternity as part of a “development” module in home room.  But, it seemed like it had an impact.  Taking the time to understand the what it all meant, I chose not to spend and live beyond my means. 

The big question posed in the article and one that I agree with is:

“Why should help be given, and possible taxpayer money spent, to home owners in trouble?”

What about help and assistance given to those who understood and played by the rules.  What do you think?  Should there be a bail out?  Is this fair?