The Mortgage crisis

Ever fond of escalating every problem into a crisis, the press has declared one with regard to the rapid increase in foreclosures and home loan defaults. The president has weighed in with his remedies and the democrats are lining up their own. For the most part, however, this is a problem for speculators and those who cannot resist the lure of “free money.” More regulation may be needed, but the real crisis is in the attitude of many Americans toward financial responsibility.

For several years the Fed has created more and more cheap money by keeping the key interest rates low and infusing the system with cash whenever a financial burp happened. This was part of a strategy to make the economy appear to be healthy and robust. In fact, it is a strategy that has weakened the economy to the breaking point.
One of the key foundations of a healthy economy is a significant portion of earnings held as savings by the average person and investment in the future by business. Both have been decreasing as a portion of the gross domestic product for many years. The result is that the capital needed for investment and job creation increasingly comes from borrowing and debt, most of which is provided by foreign sources.

What we have become is a nation that is overburdened with debt – businesses are bought out and combined by virtue of heavy indebtedness; individuals are frequently over their heads in credit card debt, and in the past several years as the housing market heated up with mortgage debt they cannot repay as well.

As housing values rose, owners were sold on the idea of taking out the equity through refinancing. The lure was to pay down credit card debt, buy a fancier car, boat, big screen HDTV, etc, with the proceeds which loans carried lower interest. Of course “equity” is not real money, it is only there so long as the market stays high. When, as now, it comes down, that equity is gone and all that remains is the loan.

Many of these homeowners took on adjustable rate loans which had low interest to start but are now beginning to “reset” at significantly higher rates and therefore higher payments. Many borrowers cannot meet these new payments and are going into default. Not only does this threaten the loss of their homes, but in many states, such as California which leads the nation in defaults, this means that the unpaid balance of the loan remains a debt even after the house is foreclosed upon, unlike the original purchase loan.

In addition, in many communities most of the defaults are by “flippers” – those who bought planning to resell as market prices rose. These speculators are one of the biggest factors in raising market prices to astronomical levels.

All those who have borrowed on the “cheap” and especially those speculators who snapped up multiple properties during the boom have priced most Americans out of home ownership, and especially now that loan practices have tightened.

For anyone to consider helping people who bought on speculation or didn’t bother to consider the consequences of financing a home loan beyond their means, government should offer no assistance at all. Those of us who had the fiscal sense to avoid these risky endeavors should not be asked to bail them out. It may be a hard lesson to learn, but it must be learned.

We must change the tendency of many to look at home ownership as an investment opportunity. Home ownership has a deservedly special place in our society and rightly so. But that is based upon the fact that it is a home, not an investment. More and more some fail to see that and regard it is just another way to make money. If that is the “new reality”, then the special tax and legal treatment of home buying should be removed.

What is really needed is the kind of fiscal responsibility by individuals and business that gives a priority for savings. We must learn to defuse the power of our consumption based economy and reign in the lure of quick money. This administration has trumpeted the “investment society” as a cure-all for the economy and its many problems. In fact that philosophy is undermining our strength in ways not terrorist could ever dream of.

If the government thinks it must act, we should encourage saving, business investment and a narrowing of the wealth gap to more traditional levels. The very last thing we should do is reward financial insanity with a bailout.