It was inevitable that the closer we got to addressing the foreclosure crisis through some form of nationalized, system-wide mortgage restructuring effort, the more homeowners would be crying foul. A headline from a New York Times article says it all: "A Mortgage Plan May Aid Many Homeowners, but it Could Irritate Others."
The premise of the story is that the "responsible" behavior by homeowners who are making their monthly payments is being "punished" whenever "our neighbors are getting bailed out despite their own bad decisions, arrogance or ignorance."
While I can understand the frustration that many homeowners are feeling, let's set the record straight on a couple of things.
1. The spike in mortgage defaults is due to a fundamental breakdown in underwriting standards in this country, not a surge in borrower irresponsibility. Loan modifications are being considered for prime homeowners, not speculators.
I used to be a banker who made loans to members of my mostly low-income and moderate-income neighborhood . I can tell you that it didn't matter how ignorant or brilliant the loan applicants were. I was never bamboozled or sweet-talked into making loan. My fiduciary responsibility to my institution -- (and as the head of a non-profit, community-based credit union, it was my moral obligation as well) -- demanded that I make a loan that the loan applicant could afford. That's what I was trained and entrusted to do.
The borrower was the least qualified person in the room to know what an affordable loan looked like, especially if variable rates and funky gimmicks were involved. At the end of the day I didn't have the luxury of telling my federal regulator or shareholders that there was a rise in loan defaults because there was an uptick in borrower irresponsibility.
2. The homeowners who modify their mortgages will still feel considerable financial pain. Unfortunately most modifications won't include a permanent fixed-payment reduction or a loan write-down, but probably a temporary payment agreement. In the primary government-backed modification program in place today, the borrower will have to forgo much of any profit that could be potentially gained in selling their home. If any taxpayer money is put at risk by a government guarantee, taxpayers could actually profit.
When companies put a line of unsafe products in the consumer mainstream -- in this case millions of abusive loans were made, often sold through a range of deceptive means that are well documented -- those companies, and often government regulators, are compelled to act to fix the problem. If my child digests paint from a toxic toy train, are you, the "responsible" parent "punished" if the government steps in to make sure that the company helps my child avoid getting dangerously ill?
The biggest lesson we've learned during this financial crisis, is that irresponsible lending doesn't just affect individual consumers, but the economy and all the participants in that economy as well. If you think you're being "punished" now, just wait until the mortgage meltdown takes your job, asset-building opportunities and any economic security you have with it.