Foreclosure Bailout? Don't Hold Your Breath

How much help will homeowners get? According to Alan Zibel of International Business Times, homeowners expecting help from our federal government shouldn’t hold their breaths. With consumer spending rolling, a healthy stock market, and a still-low jobless rate, the fallout of the housing crash doesn’t appear to be taking our economy down to the extent that the “Chicken Littles” expected (or maybe hoped?). The sky has not yet fallen.

The lending industry seems to be correcting its excesses as market forces compel lenders to change their offerings. Not to say that a few government types won’t get involved and want changes. While some grandstanding pols will likely hop on the highest soap box they can find to score points in an election year, cooler heads will likely prevail.

In a speech last Tuesday, Federal Reserve Chairman Ben Bernanke stated that the Fed has “an obligation to prevent fraud and abusive lending. At the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.”

Thank you, Ben. In all the panic (lots generated from property flippers who arrived late to the party and got stuck with unsalable inventory I suspect) people have lost sight of the fact that the vast majority of borrowers with subprime or other alternative products are successfully making their payments. Those who got greedy (lenders and borrowers), and those who made ill-considered decisions (presumably adults who can read and are legally capable of signing a contract) are paying the price.

Loan products are not inherently good or evil. For example, the recently-vilified 2/28 or 3/27 loans got subprime borrowers into homes and gave them 2 or 3 years to clean up or establish credit and refinance out. Their job was to take that time to clean up their credit during the fixed rate period so the adjustable rates didn’t come into play. If they failed to take advantage of that window it’s not the lenders’ fault or the real estate industry’s fault. Borrowers who took out option ARMs for the right reasons (those expecting income increases or windfalls, those with sufficient but sporadic or seasonal income, or those with investment strategies supported by the low initial rates) are doing fine. Those who chose to buy more house than they could afford and just hoped that somehow it would work out have stepped in it.

And unfortunately, these are the people clamoring loudest for the rest of us to bail them out.