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Tuesday, December 11, 2007

More on the subprime mess from the Economist:

The Treasury claims that the plan will produce winners all round. That is because the costs of foreclosure are high—typically around 25% of the value of the typical subprime mortgage. Lenders may take modest losses from, say, extending the period of lower interest payments yet still do better than if they pushed borrowers into foreclosure. But that begs an obvious question: if loan modification is such a win-win solution, why does the government need to get involved at all?

To me, the larger questions are of philosophy and of policy. First, what moral obligation does the government have to bail out someone who took on more than they can handle? As an ARM holder, I knew what I was getting into - a short term rate decrease that would soon be followed by either a relocation on my part, or a refi into a prime rate mortgage. That was calculated by me. Other people have tapped their equity with constant refinancing, and the housing bubble threatens to ruin their livelihood. Why is the government responsible for the consequences of those choices?

Further, the risk of subprime mortgages are securitized. Like it or not, that's how the financial markets work. Anyone want to wager on how rigid the credit markets will be once the margin of risk is reduced by a government bail out?

Two words: unintended consequences.

Paulson and the Federal Government can try to be as compassionate as they want, but this scheme just isn't the way to show compassion. Real compassion would be to hold each borrower to the same standard of personal responsibility.


.: posted by Dave 1:34 PM

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