Mortgage Crisis Bailout at Taxpayer Expense

I suppose that I have some old-fashioned ideas about debt. The first is that personal debt should be kept to a minimum. This would include consumer purchases, cars and homes. Business debt is a different issue but should be based on the business's ability to repay. The second idea is that if you incur debt you pay it back. The money that you borrow was someone else's hard-earned money. If they are willing to lend it to you it is your obligation to pay it back -- if it takes the rest of your life. I guess that's why I really have a hard time with debt forgiveness and bailouts.

Lenders have a responsibility also. They are responsible to their shareholders, their depositors (if they are a depository institution) and to the borrower. They shouldn't be loaning money to someone that is overextended. They should also counsel the borrower about debt.

Part of the mortgage lending crisis has to do with the way that mortgage packages are originated and then sold on a secondary market. The originator collects his fees and then passes on the servicing and ultimately the risk of the loan to someone else. Often, the risk of individual loans is hidden because it is blended into a package consisting of multiple loans.

This secondary market for mortgage loans has some advantage for borrowers in that it usually offers the opportunity for lower interest rates than might be the case if borrowing from an entity that intends to hold the loan. After all, a bank understands the risks associated with lending much better than the general public that might invest in mutual funds or other instruments that are comprised of mortgage debt. That is why they often charge higher rates for loans that they hold.

The downside for the consumer is that they often are encouraged to enter into a larger obligation than they can realistically expect to repay. This is sometimes justified with the idea that 1) on the average they won't own the house for more than about 5 years and 2) since the price of real estate is rising, they will be able to sell the house and pay off their debt. This falls apart in a falling real estate market.

Perhaps a solution to the problem would be a requirement that mortgage originators be required to escrow funds according to some percentage formula tied to risk exposure on a loan package that they are selling. The escrowed funds would then be tapped in the event of defaults within a sold loan package. The funds would be required to remain in escrow until a set percentage of the total value of the package was repaid. This would give them financial incentive to do a better job of underwriting the risk.

Ultimately however, it is the borrower's responsibility to repay his loans. Not mine as a taxpayer.