Obama Calls for the End of Personal Responsibility

Barack Obama has written a piece in the Financial Times (UK) calling for a government bailout of homeowners who can't pay their mortgages. The key excerpt:

The real victims in this crisis are the millions of borrowers who followed the rules, whose only crime was taking out mortgages that lenders told them they could afford. Normally, these borrowers could avoid foreclosure by refinancing their mortgages or selling their homes. The problem today is that they cannot refinance because no one will lend to them, and they cannot sell because the housing market has fallen. With some arguing that the effects of the worst subprime loans will not be felt until 2008 and 2009, this may be just the beginning.

We need to help struggling borrowers to weather this storm. One way to protect innocent homeowners - at least until this crisis passes - is to establish a fund to help people refinance or sell to avoid foreclosure. We can partially pay for this fund by imposing penalties on lenders that acted irresponsibly or committed fraud.

Essentially, Obama places all the blame for the subprime lending crisis on the mortgage companies who made the loans. Note the language he uses: "taking out mortgages that lenders told them they could afford". Do you do everything someone else tells you to do, or when you make financial decisions, do you examine your own income and earning capabilities to determine if you can afford a particular purchase.

Undoubtedly, there are villians in the mortgage industry who in a rush to create more loans and profits got people qualified who shouldn't have been granted a loan. However, there were also plenty of people whose own desires for home ownership, or desires to own a bigger and more lavish home than they really could afford, drove them to agree to deals with minimal starting rates but a big jump coming a few years later. Those people bet that rates would not increase at the steep rate they have or that they could simply refinance. They bet wrong.

So, having made a poor personal financial decision, is it the responsibility of every other taxpayer to bail them out? That's who will end up paying the bill. And if all risk and personal responsibility is taken out of lending, what do you think will happen next? If you think these loans were bad, just watch out. There won't be any reason for lenders to worry about the ability of borrowers to pay their debts if they know the Federal government is waiting in the wings to make the loans good.

The answer to the housing crisis is not relieving delinquent borrowers of their responsibility and saddling the debt on the nation's taxpayers. The market will self-correct if we leave it alone. Some homeowners will lose their homes, as they should given the poor financial decisions they made, and some mortgage lenders will go out of business, as they should because of their poor lending practices.

If you want to reduce the risk of large numbers of loan failures you must either eliminate teaser rates which allow people to borrow more than they can pay back, or require that all borrowers qualify for the loan based on a projected adjusted rate. If their current income doesn't qualify them at the higher rate, they don't get the loan. That protects the lender from defaults, the homeowners from possible repossessions, and the taxpayers from ill-conceived plans like Obama's.