Foreclosure rates have been skyrocketing and are expected to continue to rise through the end of the year. This is a tragedy.
While I have never lost a home myself, some close relatives have. Just a few weeks ago the folks who lived across the street from our lot were forced to move due to a foreclosure. If the “bank owned” signs I see everywhere are any indication, we all probably have friends or neighbors who have been through this awful situation.
It should go without saying that losing a home is a seriously crappy thing. It's devastating, it's discouraging, it's incredibly difficult. And it should go without saying that, when possible, we hope to help anyone in this terrible situation.
But just how we help those about to lose their homes — or in any awful financial difficulty — is an issue that should be handled with reason, not emotion and name-calling. And far too often the latter is employed, rather than the former.
This afternoon I read an article in Parade titled, “Help for Struggling Homeowners.” It begins with a tragic story about an unemployed, divorced mother — yes, with cancer. It's an awful story. There is no question that her situation is truly horrendous. There is no question that it would be devastating to any of us. There is no question that she needs assistance. What can we do?
Unfortunately, this sad story was the entry into an article with a bad solution. It expressed the view that banks should just be nice and renegotiate mortgages —or be forced to by the courts.
This is a country based on the rule of law. That is our protection. And yet we are willing to throw that principle out the window the minute it makes it easier for us to (1) keep something we can't pay for or (2) assuage the guilt of seeing people suffer by forcing someone else to step to help those in need (3) blame someone else for bad stuff.
Here is a rundown of the general scenario in question:
- Jack wants to buy a house, but doesn't have the money to buy it.
- Jack goes to USA Bank and asks to borrow money for the house he wants.
- USA Bank offers to lend Jack house money at x% interest with the house serving as collateral on the loan.
- Jack promised to pay bank back $x per month for x months at the rate requested.
- Jack and USA Bank — of their own free will and in what both consider an arm's-length transaction — sign legal documents recording the deal.
- USA Bank takes money from others to loan to Jack for his house.
- Jack uses money to pay for the house, with bank as owner until payoff.
- Jack moves in the house.
- Jack sends monthly mortgage payment to the bank.
- USA Bank uses Jack's payment to:
- Pay interest to those who have interest-earning deposits at the bank.
- Pay for salaries of those who run the bank and administer the loans.
- Pay for building, facilities, ATMs, statements, mailings, advertising, postage, utilities, and all other overhead.
- Something bad happens to Jack and he can't pay his mortgage.
- USA Bank sends him a letter, telling him he needs to pay his mortgage so they can use his payment to pay for those things listed in item #10
- Jack says he can't pay, but won't give back the house that was kept as collateral.
- Jack gets a lawyer to “negotiate” his mortgage.
- Politicians trying to buy votes tell everyone the bank is evil and mean and hateful.
Stop! I thought we had an agreement? I thought Jack said, “I will pay this amount every month for x months and, in exchange, you own the house until I actually pay for it.”
The bank fulfilled their obligation to him as promised. But now that he can't fulfill his obligation to the bank, he wants the courts to keep the bank from having the house the bank paid for (with other people's money). He wants to keep the house and keep the payments. And if the “mean” bank doesn't comply, he's going to get a lawyer to impose, as the article said, “a tiny bit of arm-twisting” to the bank.
How does the bank come out as the bad guy in this story?
To the mathematical point, when Jack doesn't pay his mortgage and the courts and arm-twisters force the bank to reduce Jack's mortgage, who pays for the difference? Answer: Other real, living, breathing people.
Someone pays. Someone always pays. And when we use tragedies to make policy, we always forget the real victim: the person who actually ends up paying.
What is my solution? First, let me warn you, you won't like it. It won't fix the problem, it will only help, sometimes. And I have no big, evil, faceless entity who will pay the price for all the world's ills. Because there isn't one. It's always people who pay. Other human beings who are forgotten in the equation. And forgetting them is fundamentally wrong and unfair.
Having trouble paying your mortgage? Here's my amazing plan.
- Increase income to pay your debts.
- Slash spending to pay debts.
- Request longer payout period from bank or other term modifications that allow you to pay your entire debt within your means.
- Request assistance from family.
- Request assistance from church.
- Sell house and move to one you can afford.
- Consider sharing space with other family members and pooling resources to pay debts.
- Temporarily move to a more affordable place while renting your place to someone else.
- Create an apartment to rent to others.
That's it. Nothing complicated or fancy.
It seems common sense to me that the person who signed the contract is responsible for the payments. And unless the bank engaged in fraud (and I don't call “not reading the contract you signed” fraud), the bank isn't the problem.
As far as other “assistance,” I'm all for it — as long as it's voluntary. The woman in the story was helped out by her family. Bravo! And what could be better than if the people in her community got together to do something to help? Hooray!
But forcefully taking the resources of others — without acknowledging those harmed or weighing the opportunity cost of those redirected resources — is extremely bad fiscal management. And it's patently unfair and un-American.