Foreclosure Bailouts Helping Some at The Cost of Others

December 17th, 2008 | Tags: Foreclosure

Foreclosure bailouts are helping some at the cost of others. Today the administration is going backwards to help the truant borrowers who took loans beyond their means.

Mark Goldman of San Diego State University said, “There’s always the issue – I’m paying my mortgage even though I’m upside down and my neighbor is not.” He argues that by allowing delinquent borrowers to drop into foreclosure more harm will be done to the entire financial infrastructure. This is the main and fundamental reasoning behind the governmental move to fund the rescue measures. He explained, “The appropriate public rationale (for the bailouts) is to support housing prices. The reason they’re doing this is to stop plummeting prices and everyone benefits from that.”

The hypothetical case of John and his wife Mary will illustrate the dichotomy. They both bought houses. John purchased a modest one for $240,000 with 20% down payment and a fixed rate 7% interest for a 30-year mortgage. His monthly payments towards the mortgage calculated to $1,596 per month. Mary walked into an opulent house priced at $500,00with only 5% down payment. Her monthly payments calculated to only $1,725 per month. But in due time her mortgage balance swelled and the principal due became $550,00. Her monthly payments increased to $3,659 – something she could ill afford. But responding to a government rescue package her lender reduced the interest to 3% and extended the loan term to 40 years. This brought down her monthly payment to $1,790 – not much more than what John has been regularly paying for his modest house! Thus Mary is being able to hang on to her palace because of the government using the money John has given to the government as taxes.

Some taxpayers are angry because the help has come too late for them. Tony Galindo is one of the many sufferers. He bought a house in 2005 for $283,000. He made a down payment of $60,000 and continued with monthly payments of $1,500. His job was comfortable but things became stormy with a divorce and debts incurred by his ex-wife. He had to lose his house in June because of foreclosure. Tony argues, “My opinion is that it’s great that the government is going to help people in trouble. But where’s my help? I’m eager to purchase a new home but due to the foreclosure on my record that seems years away. I can afford another home, but foreclosure has closed the door on that.”