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Jack M. Guttentag The Mortgage Professor

Jack M. Guttentag, The Mortgage Professor

Should We Help Borrowers Who Don‘t "Deserve" It?

by Jack M. Guttentag

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Fair (727 Ratings)
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Posted on Wednesday, May 27, 2009, 12:00AM

I don't ordinarily like to publish long letters, but this one is worth the space because it captures the mood of a sizeable segment of the population:

"I'm upset by your recent article advising people having trouble with their mortgage on how to get it modified. In my view, they should be allowed to take their lumps...

"My first home was a single-wide trailer that cost $18,000, which was all we could afford at the time. We have upgraded three times since then as our family and our income have grown, but we never paid more than we knew we could afford...We have never missed a mortgage payment.

"I am tired of hearing the sad stories of people that overbought because they thought that house prices would rise forever and they would get rich. Their garages were full of boats and other toys that I don't have because I can't afford them...

"It drives me nuts that these people can now take advantage of programs that reduce their mortgage payments, and I'm paying for it with my tax dollars.

"The government should aim to promote good behavior, with programs that benefit homeowners who have played the game of finance the right way. Instead, government is helping the ones who were greedy, or stupid, or who lived beyond their means.

"I'm also tired of the media, including your articles, supporting these bad government policies by playing up how rough it is for these people whose lavish lifestyles have gone awry."

It is hard not to have some sympathy for this view. The measures government has taken to deal with the financial crisis are indeed unfair, rewarding many who don't deserve it while burdening the many innocents who must finance it. So why do we do it?

In large part, we do it because inaction would not punish the guilty alone. It would also destroy the livelihoods and disrupt the lives of millions of others who have done nothing to deserve having their lives disrupted.

Every foreclosure we can prevent now, even if the borrower we help is a greedy speculator or a profligate spendthrift, is one less house being thrown on the market, which ultimately will prevent the layoff of three people who would otherwise lose their jobs. Note: The number "three" is my guess; any econometricians among my readers are invited to correct it.

Furthermore, many consumers having mortgage troubles today were not greedy or extravagant; their only character deficiency was a lack of foresight, which afflicts most of us at one time or another. In particular, they didn't anticipate that house prices would plummet as they have; I didn't anticipate it either. The price drop has been an underlying or contributing cause of most mortgage problems.

It is interesting that the issue of deservedness does not arise in connection with aid to banks, auto companies, and other firms. Most would agree that the firms getting the aid are the least deserving, but there is a grudging acceptance that this is a necessary price to pay for maintaining the viability of the system. When it comes to individual borrowers, however, the systemic implications are ignored, perhaps because the fate of any one borrower will not affect the system.

Policies that attempt to limit assistance to deserving borrowers, however, do impact the system because large numbers of borrowers in trouble are denied help. This is certainly the case with the government's program of assistance for loan modifications, which excludes investors -- those who don't occupy their homes. The rationale for viewing investors as non-deserving is extremely weak -- most are small businesses and include many members of the armed forces. But even if investors were not deserving, foreclosing on the homes they own has the same negative impact on the system as foreclosing on the homes of the deserving.

There is another reason to help homeowners with mortgage problems, even when the problems are of their own making. When we replaced debtor prisons with bankruptcy laws, we became a forgiving society that offered people who had erred to have second chances and fresh starts. It is a long-standing tradition that has served the country well.

In my view, the valid rap against the current government programs to curb foreclosures is that they have been too timid to have the major impact we need. That timidity seems to reflect a misplaced concern by policymakers that government not appear to be assisting undeserving borrowers. As a result, many deserving people are going to lose their jobs.

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290 Comments

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  • Christian M - Wednesday, July 1, 2009, 4:54AM ET  Report Abuse

    • Overall: 1/5

    I strongly disagree with you, Jack. This is the identical argument used in Europe to justify the bigger government and large social costs. Whatever happened to accountability? By the way, I don't believe we should have given GM and Chrysler one penny either...the government should NOT be in the businesss of picking winners and losers.

  • Yahoo! Finance User - Monday, June 29, 2009, 6:08AM ET  Report Abuse

    • Overall: 1/5

    This is the same drivel we see over here in Ireland, although its only the banks and builders that are being bailed out. I bought my house a few years ago but have been paying down the mortgage at higher rates than the minimum required by the banks. Why? Because I know that 25 years is a long time in which things can change massively, like now. I have sacrificed in order to pay it down unlike many many others I see taking 2 and 3 foriegn and expensive holidays, buying a new big expensive car and SUV every year or two. Buying the best of designer clothes and gadgets for their over priced houses. Proping up house prices is a fools game. It is overpriced houses and unregulated lenders that got the US into so much trouble and that spread across the world. The loan styles (subprime) started in the US and it was not long before Irish and other European banks did the same. Then they thought of securitisation which infected the global system like a virus. NINJA mortgages - WTF??????? A hard lesson needs to be learned and that unfortunately means pain. This will not deliver the medicine so urgently required.

  • Yahoo! Finance User - Sunday, June 14, 2009, 8:54PM ET  Report Abuse

    • Overall: 1/5

    To the person who claims they may lose their home and asks, "What are we going to do?" I think I have a solution to your problem: RENT! MORE THAN 30% of AMERICANS RENT! WHY CAN'T YOU?

  • Jamie M. - Sunday, June 14, 2009, 8:37PM ET  Report Abuse

    • Overall: 1/5

    Mr. Guttentag's claim that a foreclosure loses three jobs is bizarre. A foreclosure doesn't lose jobs for anyone. It merely allows the lender to take the house and sell it in order to minimize it's losses. The person foreclosed is able to rent for less than what he/she was paying (or was supposed to pay at least) in mortgage payments. The foreclosed see their disposable income go UP after the foreclosure, which is good for the economy. And the resale of the house at a lower price helps correct housing prices, so that buyers can more easily afford homes. We won't see a recovery until housing prices are corrected to market levels. My wife and I have credit scores above 800 but we rent because we can't afford a home. Prices in the New York City area are still ridiculously high. Using our tax dollars to keep them artificially high is not just unfair, it is dumb economics.

  • Yahoo! Finance User - Saturday, June 13, 2009, 2:48PM ET  Report Abuse

    • Overall: 1/5

    it boggles the mind that your labeled an "expert" on this disgrace of a website. the absolute best and only true solution to fix this crisis is let housing prices drop to where they should have been! Prices are still artificially high and that is killing out economy. Let the prices drop to where they should be and more people will own homes, and not as investments, but as places to live and raise families as they should be. Your articles promoting the propping up of bogus housing prices, socializing the loss and privatizing the gains to the banks are doing a great disservice to this economy and this country. Start living in reality and accept the truth that this bubble had to pop and no amount of government spending can get us out of it. The only thing this countries adoration of keynessian economics can do is destroy the lives of us and further generations to come with loads of debt that is impossible to pay back, maybe when the double digit inflation hits people like you will wake up...but i doubt it because your pride and faith in this keynessian gvmt won't let you. Do us a favor and stop writing articles that spread propaganda and lies to lead Americans into believing the bailouts were soooo essential and the gvmt is here to save us, and start living in reality. Everyone on here reading this, STOP following the yahoo finance experts and follow people who have been right for the past decades like Jim Rogers, Peter Schiff, Gerald Celente, Max Kieser, and Marc Faber

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