Git yer buckit, we’re bailin’

There were multiple announcements today of home mortgage bailouts in
the US – from
Citibank to its customers,
as well as US Federal bailout plans via
Freddie Mac and Fannie Mae.

The Citibank plan offers the possibility of reviewing the principal of
the loan as one possible parameter to adjust in aiming to bring the
mortgage payments of a principal residence under 40% of monthly
income.  Wait a minute — isn’t that retroactively changing the
price of the house you bought?  How is that fair to the
neighbours?    Or to those who purchased more modest
homes?  Well, the answers there are:

1/ it isn’t fair, nobody ever said it
would be; and
2/ it’s Citibank’s money — they aren’t obliged to be fair, and they
are “simply” acting to do what they believe will yield the best return
on their investments.  A defaulted mortgage is not good for
anyone’s business.

As a flipside of the fairness coin — those who are not concerned about
whether or not it is “fair” are concerned with whether or not the
availability of bailouts for some will cause an escalated demand from
those who have been struggling but surviving:  why should they
try, if they can get a bailout?

Also, it’s not entirely clear that banks will simply slash the value of
the principal.  Other
banks are apparently considering
different things:

“[…s]omething called principal
forbearance. There, the bank carves off a chunk of the money you owe
and puts it aside. You continue making payments, now lowered, on the
rest of the loan. When you sell or refinance later, however, the bank
adds that chunk back onto the total amount you must repay. By then, it
is hoped, the value of the home has rebounded or you’ve built up enough
equity to make the bank whole.”

The federal plans are already coming under criticism because they will not adjust principal.  Well, this is taxpayer money — why should I pay my taxes to bail out someone who bought a house that I would only dream of (and, unlike them,  had the good sense to realize I could not afford?)  But, “experts” are concerned that people will walk away from mortgaged homes if their mortgaged value is greater than the current value of the home.     In other countries, people doing that would be crushed by the inevitable ensuing personal bankruptcy; in the US, that’s not currently a very difficult reputation to shed.

The math here is really not simple, as the pros and cons have to be
weighed to consider

1/ The current situation was caused,
in a large part, by people making bad, overreaching choices in an
atmosphere that was devoid of expectation of (negative) consequences

Being able to walk away from some or all of a mortgage does nothing to
address that.

2/ The current situation goes well
beyond the mortgage market.
  We haven’t even begun to see
the extent of the credit crisis, but we need to be aware that it is not
limited to the US (there are global collapses).  

3/ The “righting” of markets is
taking down giants
  — such as DHL and General
Motors.  If and as these types of companies fail, the
repercussions reach far and wide.  The American
auto industry has a broad reach:

“[…] directly employs about 355,000
American workers, and it says that, through related industries that are
dependent on auto manufacturing and sales, it supports about another
4.5 million jobs.”

The impact of not propping up mortgages,  GM, etc, even if it
means bad decisions get rewarded, may be far too great to ignore. 
So, the questions are — is it possible to bail out “enough”, and how
do we ever get to a situation of adequate responsibility for individual
choices so that we can stop the madness of the spiral of bad decisions
that got us here?

Have we even begun to see the bottom of this hole?