Outrageous Mortgage Foreclosure Settlement Rewards Irresponsible Homeowners

     Forty-nine of the American states (all except Oklahoma) recently accepted a settlement with five major banks for $25 billion of a lawsuit brought by the Obama Administration. The lawsuit was brought ostensibly to fix the problem of reckless mortgage foreclosures by the banks. 

     The banks violated the law with hasty paperwork, but few of the foreclosures were improper. However, the relief for those few homeowners who were improperly foreclosed upon is paltry – only $2,000. Much of the money from the deal is instead intended for people other than these true victims.

     The foreclosure deal includes much help for homeowners whose home values have dropped below the value of their mortgages. They will receive principal reductions. Other homeowners having difficulty making their payments will also receive help. Many of these homeowners lied about their creditworthiness or got in over their heads by borrowing money for homes much larger than needed. Most of these people were irresponsible homeowners. Therefore, this deal rewards cheating and irresponsibility. 

     Although this money from the mortgage deal is private, not public money, it was forced by government. The cost will be passed onto bank customers. The money supplants other Obama Administration aid to irresponsible homeowners. 

     The mortgage crisis was caused by federal government policies. Both the Carter and Clinton Administrations forced banks to make loans more widely available (i.e. to decrease the standard for creditworthiness) in order for more poor people, especially minorities, to own homes. The easy credit policies were exacerbated by Fannie Mae and Freddie Mac, which had implied they were backed by the federal government, which had chartered them. Thus, more people bought homes who were not prepared for the financial responsibility. Some of these irresponsible homeowners were unable to keep up with the payments from the beginning, but when interest rates rose on mortgages, most of the rest also became unable to keep up with the payments. In turn, the real estate values dropped, trapping these homeowners “underwater,” as the loan (the mortgage) exceeded the value of the collateral (the home). 

     When the crisis occurred, liberals, who ignored repeated warnings by the Bush Administration about this problem, blamed the crisis they had created not only on Bush and the Republicans, but especially on the greed of the rich banks, as if the banks had forced all of their loans on the poor. Predictably, the liberals used the crisis to demonize bankers, blame the free market and seize more power for the federal government. Although there were certainly irresponsible and even predatory lending practices, greed and other abuses, this crisis was caused primarily by the distortion of the free market by government, as well as by the greed of the irresponsible borrowers to which government had appealed. 

     Responsible homeowners whose home values have dropped because of the mortgage foreclosure crisis but who are not underwater on their mortgages will receive no compensation for their loss.

     Many on both the left and populist right have criticized the bailouts of the banks. They argue that the money from the mortgage settlement essentially had been set aside by the banks from the bailout funds, which means that the banks do not need to pass along the costs to all customers, including responsible homeowners. The liberal argument in particular is that the banks received billions of dollars that they should not keep, but pass along the money to the struggling homeowners, including the irresponsible ones. I shall take this opportunity to refute some of the criticism of the bank bailouts. 

     As with other so-called “bailouts,” the federal money given to the banks was in the form of loans, not grants, much of which have been paid back with interest. The money was not necessarily sought by the banks. Indeed, some were forced to accept it. Moreover, the loans to the banks were necessary in order to make up for the considerable economic harm caused by federal policies. It was far more cost-effective to loan banks to prevent their collapse and the seizing up of credit than to bail out all bank deposits insured by the Federal Deposit Insurance Corporation. In other words, the loans represented a “depositor bailout” more than a bank bailout, in addition to restoring credit for all who needed to borrow money. One can reasonably disagree with the policy of risking tax money in order to aid businesses, but my point is that a reasonable exception ought to be recognized when government creates the problem in the first place. 

     This mortgage foreclosure settlement is even more unfair and outrageous than the earlier Obama Administration programs that gave federal tax dollars to irresponsible homeowners – the same policy that sparked the Tea Party movement. I call upon conservatives to oppose more vociferously all unnecessary government intereference in the free market, especially those policies that reward irresponsibility and punish responsibility.