Mortgage Crisis

I find myself torn about what to do about the looming mortgage crisis. On the one hand, I am compassionate towards those who were suckered into a bad mortgage, the so-called subprime loans. Hundreds of thousands of people got into their first home because they finally could. The entire practice was carried out by banks who knew exactly what they were doing, and thought that they could get away with it. And it is terrible for families to be foreclosed on because their interest rates rise (as expected) and they can't afford the mortgage payment.

But I'm not so sure about the current plans to "bail out" these families by freezing the interest rate. Ultimately that means that a person's unwise decision is being rewarded, and families who bought more house than they could actually afford, are being rewarded.

We got our home on a fixed-rate mortgage at 5.5%. But suppose I had been suckered into a balloon mortgage and got a much bigger, more expensive house, at 2.5%? Interest rates rise to 6%, and now I can't afford my mortgage. Is it fair to freeze my interest rate at 2.5% for 5 or 7 years, and let me go on having this much bigger house at a steal of an interest rate that nobody else could ever have legitimately gotten? That doesn't seem right. Those families that made the bad decision are having their homes effectively subsidized by the ones who made good decisions.

And if the "bailout" extends the low interest rate for 1, 2, 5, or 7 years, whatever it is, what happens at the end? Another bailout?

It seems that any "freeze" on interest rates, must be accompanied by forced refinancing -- in other words, if you accept the interest rate freeze, then the homeowner accepts having their loan refinanced within 1 year. And if they can't afford the refinanced loan, then, it seems to me, they have to accept foreclosure -- they will have to sell their home and buy a smaller home that they can actually afford.

This does not change the fact that our communities desperately need housing reform. I have not lost sight of the fact that in a moral world, everybody would have a place to live.