Taxpayers: Furious over homeowner bailouts
Many Americans are outraged that their money is being spent to rescue irresponsible mortgage borrowers. Still, that probably won't stop government officials.
NEW YORK (CNNMoney.com) -- Ask most Americans whether they're in favor of spending taxpayer dollars to help delinquent mortgage borrowers and you're likely to get an emphatic "No!"
But the government didn't ask its citizens before it committed hundreds of billions of taxpayer dollars to guarantee loans through various foreclosure prevention initiatives such as FHASecure and Hope for Homeowners, which let troubled borrowers refinance expensive mortgages into more affordable loans. Nor did it take a vote before it agreed to fund the new streamlined mortgage modification programs for loans backed by Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).
And now there is the possibility that some of the hundreds of billions of dollars allocated for the Treasury's Troubled Assets Relief Program will go towards bailing out borrowers.
Taxpayers are mad - especially those who held off buying their own homes or were careful not to spend beyond their means.
"All these idiots who bought homes they couldn't really afford are going to be rewarded with loan modifications, but what about those of us who didn't make stupid decisions?" asked Jay Black, a CNNMoney.com reader who rents in Queens, N.Y.
"I could have purchased two years ago using an option ARM, and now the government would be paying to reduce my balance. But I didn't. What the hell do I get?"
Alice English, of Highland Falls in upstate New York, feels the same way.
"I made $45,000 a year and I didn't buy a house. I bought a mobile home because I knew I could afford it," she said.
But then she took a buy-out from her job as a technical specialist for a nuclear power plant, and her finances deteriorated, putting her home in jeopardy. She may lose it. And there's little any lender will do for borrowers without income.
"My severance package has ended," said English, "my credit rating is going down the tubes and we are going to bail out big companies and idiots who took an ARM who knew they couldn't make those payments. And here I sit, no job, no help, but billions are going to help those who created this problem."
The case for bailing out homeowners is that foreclosures have far-reaching effects. As delinquencies have skyrocketed, most of the country has suffered steep home-price declines which has helped cripple the economy. Helping some homeowners but not others may not be fair, but it's necessary to keep the economy from deteriorating even further.
"There's always the issue - 'I'm paying my mortgage even though I'm upside down and my neighbor is not,'" said Mark Goldman, a real estate professor at San Diego State University.
Letting delinquent mortgage borrowers slide into foreclosure will only do more damage to the entire financial system, according to Goldman. That's the most fundamental reason to support government funded rescue efforts.
"The appropriate public rationale [for the bailouts] is to support housing prices," he said. "The reason they're doing this is to stop plummeting prices and everyone benefits from that."
Still, it's easy to understand how some people can feel taken advantage of. Consider the hypothetical case of one warehouse manager named John and his colleague Mary. The two make about the same salary and are both married with two young kids and stay-at-home spouses.
A few years ago both bought homes, John's a modest three bedroom, two bath. He put 20% down and financed $240,000 with a 30-year, fixed-rate loan at 7%. His payment is $1,596 a month.
Mary went for an opulent five bedroom, four bath, 3,500 square foot McMansion that cost $500,000. She put just 5% down and financed the rest with an option ARM, making the minimum monthly payments of just $1,725. But that caused her mortgage balance to balloon, and now Mary has to start paying down her loan's principal, which has reached $550,000. That means a monthly mortgage payment of $3,659, which she can't afford.
Luckily for Mary, her lender has reduced her interest rate to 3% for five years, deferred payment on $50,000 of the balance and extended the length of the loan to 40 years, all with the help of one of the new, government-backed rescue programs. That reduced her monthly mortgage bill to $1,790 - not much more than what John is paying for his more modest home.
Mary is essentially able to hang on to her palatial home with the help of some of John's tax dollars - and as important as that is for the larger economy, it's hard to argue that it's fair.
Other taxpayers are angry simply because the help that's now available didn't come in time for them.
Tony Galindo bought a home in Ridgecrest Calif. for $283,000 in 2005. The one-time career Navy man put $60,000 down and financed the rest with monthly payments of $1,500. His current job with NavAir, which develops weapons systems, pays $6,200 a month, more than enough to afford a nice home. But due to a divorce and some debts incurred by his ex-wife, he lost his house this past June, and can't buy another any time soon.
"My opinion is that it's great that the government is going to help people in trouble," he said, "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 the foreclosure has closed the door on that."
Others question why so much of the available foreclosure prevention help targets only severely delinquent borrowers who are at least two or three payments behind.
"Why does a homeowner have to be behind in their mortgage to qualify?" asked Tamila Fiola of Fall River Mass. "Why can't help be brought to those that are struggling to keep the note current? My sister in law pays over $5,000 a month for her mortgage; she struggles to make it but she does."
It's probably impossible for the government to answer those kinds of questions to the satisfaction of all Americans. And yet, the financial turmoil brought on by the mortgage meltdown will likely demand that the government make even more efforts to stabilize markets.