The Unanswered Question

(First, I'd like to apologize in advance to all who feel like they've been browbeaten by the media regarding the "mortgage meltdown," the "economic crisis," or the "we-can't-call-it-a-recession-yet-but-we-will-anyway." I normally don't like ranting on such topics, but here goes...)

As somebody who attempts to know a little bit about the inner workings of the economy, I've been following the roller coaster ride of the last year with some interest. I'm fairly insulated from it all as a grad student—there's not much difference between being poor because you're in grad school and being poor because you just got laid off—but it has been interesting to watch, especially people losing their heads over problems which will just sort themselves out in the long run. As a society, we've become greedy and impatient, and that's the root of the problem, bad mortgages aside.

The vogue thing to do in political circles these days seems to be promising relief for "Main Street" as well as Wall Street. And usually when politicians presidential candidates make those promises, they tend to focus on people who are in the midst of losing their homes. "These are good people," we hear, "who just can't afford to make the payments anymore." While I can't vouch for the character of the individuals involved, I can sympathize with not having enough money to buy something I want. When that happens, though, I don't run to the bank (or the government!) and ask for money. Instead, I go without.

The relief being promised to delinquent home owners varies, but it usually involves having the taxpayers buy the mortgage, and then renegotiate the terms taking into account the decreased value of the home. There are a number of problems with schemes like this, but the question I haven't yet heard addressed is this: What happens with the homeowner sells the home in a few years?

Only two people should care what the "value" of a home is: a potential buyer, and the county tax assessor. The "value" of a home is only what somebody else is willing to buy it for, and that only happens when the owner looks to sell. The fact that somebody may be "underwater" in their mortgage isn't worth a hill of beans, unless they try to sell the home. The flaw in the proposed rescue plans is that they look at home values right now in a depressed market. What happens when the government writes down the values of these homes, renegotiates the mortgage, and then the homeowner sells for a nice profit down the line? He gets a nice chunk of change, but the taxpayers end up footing the bill.

Don't get me wrong. I'm all in favor of helping the innocent victims, but I think they number far fewer than we think. Instead of decreasing the mortgage amount, why don't we just subsidize the loss somebody takes when he sells his home? It wouldn't "bail out" people who can't make their current payments, but it would help them—by forcing them to either live within their means or find a way to make that payment. It may be tough love, but hopefully this approach will introduce some accountability back into the system.

In either case, though, I'm not too worried about a Main Street rescue happening: it's just a campaign promise, after all.