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Mortgages and government intervention
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We are currently in the process of applying for a mortgage and trying to buy a house. Here in north San Diego county, home prices have been skyrocketing for years; between about 2000 and 2006, they went absolutely nuts. When I applied for my current job, one of the things I asked the hiring committee was "Where the heck do you people live?"
Although we are fine with renting, we have always hoped to someday have a home of our own. When we moved here is 2006, the idea of applying for one of these interest-only, ballooning, insanely risky mortgages did occur to us. We have excellent credit (although little or no down payment), and given how freely they were being tossed around, I have no doubt we could have gotten one. However, they seemed like an insane risk--taking on debt far beyond your means entails betting everything on home prices continuing to skyrocket or major jumps in income, and we were not willing to bet on either of those. So we found a nice place and rented, figuring that home prices couldn't keep doing this forever.
Now that the housing bubble has collapsed, San Diego county has been one of the worst-hit places in the country. There are substantial neighborhoods around here where huge numbers of homes are undergoing foreclosure or short sales, and prices are plummeting, especially at the low end of the market. Suddenly, there are lots of houses in our reach, and our credit is good enough that lenders are willing to talk to us even though we have very little cash available. We've got a bid on a short sale right now.
Given all this, I've been thinking a lot about the mortgage crisis, and the proper response of government to it. I don't wish harm on anyone, and I don't specifically want to see anyone lose their homes...but I am not sure I think that massive government intervention is appropriate here. I certainly have a great deal of sympathy for those who are victims of predatory lending, or who were deceived as to the nature of their loans. Although it is the buyer's responsibility to understand the terms of the loan, it is also the lender's job to be upfront and clear about them. In cases where people were deceived, I can see action taken against the lender.
In many other cases, though, when people either neglected to take the time and effort to understand the loan terms or chose to accept the risk, although I feel bad for the difficulties they will face, I do not think that governmentally-driven modifications to their loans is appropriate. If you are buying a house you can't afford, on the assumption that it will rise in value and you will be able to make a profit or refinance it, then you have bought an investment, and a risky one at that. Investments always carry the risk of loss.
I know that losing one's house feels very different from having a stock investment go south; homes represent shelter and stability. But buying a home as a home usually entails making sure that you can afford what you buy--after all, if it is going to represent shelter and stability, it doesn't make sense to buy something you are sure to lose unless things turn out just right! If you buy a home not as a home, but as an investment, then it seems dishonest (when the investment goes bad) to portray the consequences as "losing one's home".
There is also the issue of public risk and private profit. When the government insulates people from their bad decisions, that implies some public assumption of the risk of an individual's investments. If a person makes a good investment, though, there is great outcry at the notion of taxing the profits from the good investment.
Likewise, unless those buying houses they could not afford intend to offer up a substantial percentage of the profits from the sale when they do manage to have it come out well, it seems illegitimate to expect help avoiding the loss if it goes badly. It is not fair to expect private profit, but public risk.
I know a couple who bought a house in the Los Angeles area during the middle of the housing boom. They made good money, and could actually afford some of the homes they were looking for. However, they chose to buy a very expensive home (about $200k beyond what they could afford with a traditional fixed-rate mortgage) by taking on a low-introductory, ballooning loan. As it turns out, they ended up selling the home for a decent profit about six months before the collapse started, so they never ran into the balloon on the mortgage (which would have bankrupted them). That's fine--they bet well, and while I wish they had not been involved in the market bubble which drove prices out of most folks' reach for so long, I don't really hold it against them. They had the money to make the bet, and it paid off for them; that's how the market works.
But if they had gotten stuck and lost the home, while I would have felt very bad for them, and would have welcomed them to stay with us while they found other housing--I would not have pushed for legislation to keep them in their house at your and my expense, or by forcing modification of the loan terms.
I end up with mixed feelings here--I don't want to see people forced out of their homes, but I suspect that the cost of government intervention may be unsustainably high.
On the other hand, I don't favor any bailout of the lenders who made the loans, or investors who bought them, either (again, unless fraud or deception can be proven). Assessing risk is the job of those making loans and buying them as investments; if they have failed to do so properly, then I see no reason why they should not take the hit. To do otherwise would be to reward them for a poor business decision.
But I know nothing of economics, as I have said, and I am sure there are many factors I have not considered. That's why I posted this here--so y'all can show me where I have this wrong. Please help me out. 
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