Can We Please Have Some More Personal Responsibility in Our Finances?

Here's a piece from Yahoo on how one senator wants the government to foot the bill for the subprime lending fiasco.  On one hand, the effort makes financial sense:

A report by the Joint Economic Committee of Congress, which Schumer chairs, estimates that the average cost of a foreclosure -- to the homeowner, lender, local government, and neighbors (whose homes decline in value) -- is $78,000. By contrast, preventing the foreclosure would cost $3,300 per home on average.

Spending $3,300 to save $78,000 is a no-brainer -- I wish all government spending was so productive. Then again, is $78,000 a real number and will $3,300 really save the day for someone who borrowed way too much on a bad loan? The numbers are from the government, after all, so I'm not quite convinced they are accurate.

Besides, what about personal responsibility? What about the freedom to make our own decisions (and the "right" to accept the consequences of them?) Shouldn't people suffer the effects of their own financial stupidity?

That's what Laura Rowley thinks. Her position:

On the other hand, as far as I can tell, none of these modern-day bandits held a gun to anyone's head and forced them to take out a loan.

"There's a lot of discussion in Congress about how these are predatory loans, and widows and orphans are being thrown in the street," says Keith Gumbinger, vice president HSH Associates, a financial publisher. "But some of the issues we're dealing with today are self-inflicted wounds -- people who didn't bother to read applications or documents and signed for a loan."

Someone once said "you do the crime, you do the time." Same applies here doesn't it?

She continues:

Clearly, lenders, investors, and homeowners should step up to the plate here -- not taxpayers. In a hearing on the crisis in March, Schumer said families were "teased into unsuitable subprime loans."

"Teased into"? What kind of language is this? When did we transform from being a culture of opportunity to a culture of victimization? Taking out a mortgage is a choice, and choices have consequences. If we want to own our financial successes, we also have to own our financial mistakes.

And what kind of message does a government bailout send to Americans who did things the right way? People who had a job, paid their bills on time, built solid credit scores, saved for a down payment, read their loan terms, and scrutinized their budgets to make sure they could afford not only the mortgage payments, but the taxes, insurance and maintenance on their homes?

She's on a roll:

More important, what kind of precedent does a subprime bailout set? Undoubtedly, foreclosures will cause personal tragedy, as well as economic dislocations in the affected communities. But there's a much, much larger crisis brewing: Rising poverty among the soon-to-retire baby boomers who haven't saved for retirement.

When they can't work any longer, and don't have enough to live on, and cause a dislocation in the economy, will Congress bail them out too? Will Schumer be around to go after the "rogue" retailers and "bandits" who "teased" Americans into buying consumer goods when they should have been saving for retirement? Or will the government just put the burden on those of us who have done the right thing all along?

This is one issue that irks me about our society -- everyone wants to blame someone else for their own mistakes. They want the right to do whatever they want to do, make whatever decisions they want to make and so on, and as long as things are good (whatever good means to them), all's right in the world. But the second things turn south, they're looking for someone to blame. After all, they themselves couldn't be the ones to blame now could they?

The same holds true for personal finances. People have the right to spend their money however they want it. They can enter into whatever contracts they want to. They can save or not save, spend or not spend, invest or not invest -- it's all up to them. But then they need to live with the consequences of their decisions.

Yes, as a society we will certainly be better if we bail out people from some stupid decisions. It will be better for me and you to not have people with no money wandering the streets. But this is an extreme example. Will it really hurt us that badly if a few people suffer for poor financial judgment?

And what really galls me is the fact that the principles of personal finance are so basic, simple, and easy to learn that anyone out of elementary school can understand them. Personal finance is not rocket science (if it was, I couldn't write about it). If you simply do the basics right, you'll be well off. It seems that most people can learn and apply wealth-building principles -- but they just don't want to. Instead, they "wing it," make whatever un-informed decision they want to make, then expect the rest of us to bail them out.

Whew! Thanks for letting me rant. I'll be back to my normal self soon. ;-)

Comments

[Duane Gran]

Just today the Coyote Blog presented a very useful test to determine if you see the subprime issue as a marketplace issue or a social ill:

http://www.coyoteblog.com/coyote_blog/2007/04/capitalism_rors.html

I think you and the readers will find it interesting.

[Easy E]

Hey, will you guys buy me a house?

[Brad]

That's a bad idea for the government and many legitimate companies out there that flip houses. What would happen to all these companies that make most of their money off of flipping houses? It would devastate my plan to earn another $10k, to invest, for the year!

[Ciji]

I agree, there needs to be much more personal responsibility in this world. However, as someone who narrowly avoided getting into dangerous mortgage, I can tell you that even tho' there's not an actual gun to your head it sure feels like it. I was 30 something, single, no kids, and all my friends had homes, husbands, families. I felt a lot of pressure to 'show' I was a success, too. Silly, yes, but when you've been working so hard for so long, you want a home to call your own. I feel many of these people made a financial decision based on emotion. You fall head-over-heels for this house and when the broker starts talking numbers you turn a deaf ear. I can honestly say that if my parents hadn't talked me out of buying that house I so loved, I would have been facing foreclosure right now.

It's easy to speak of the basic principles of financial being simple, yet I know few people who know them. My parents were good people, successful, and highly educated, yet they never taught me about credit cards. And the only money lessons we had in school were counting it and balancing a checkbook. I had to seek out that info, and even then is was only out of need, not desire. I didn't know I needed to learn about money until I was in such financial disarray I had no choice. So I don't think it's a matter of most people are just lazy and flat-out refuse to learn about finance. I think the majority of folks don't even realize they don't know anything until it's too late.

[Kurt]

"A report by the Joint Economic Committee of Congress, which Schumer chairs, estimates that the average cost of a foreclosure -- to the homeowner, lender, local government, and neighbors (whose homes decline in value) -- is $78,000. By contrast, preventing the foreclosure would cost $3,300 per home on average."

Little of this is a deadweight loss, however. For instance, the lower home values in the neighborhood is merely a wealth transfer to the people who are looking to buy those houses. It doesn't do anything to increase the overall wealth of the nation. However, interfering in the free market (where there is not a market failure) is always a bad idea.

[Suze]

The government bailed out Chrysler, didn't they?

It's not like the market has never been interfered with before.

Many corporations are just as irresponsible as individuals. Outrage over fiscal incompetence can be shared across the board.

[Chris]

Lowering the value of existing homes? So what! Isn't that the market rebalancing itself anyway? One of the reasons houses are worth so darn much is the sudden boom of potential buyers with new fancy loans all driving up the prices. Did it make much sense for a $200k house to balloon to $600k in a few years?

Most of those $78k devaluations will occur to homes that are already overpriced to begin with. That in itself will open up the market to families that have been driven out of it because of the pricing wars, those that didn't jump into dangerous loans to keep up the pace.

And unless you were unlucky enough to buy one of those homes at $600k when it was $200k just a few years ago, you should still have plenty of equity to protect your loan from going upsidedown should it devalue $100-200k.

Assuming you didn't take out a home equity loan, or second mortgage, and borrow yourself into a black hole.

Let them foreclose, let the market suffer a while. Otherwise borrowers and lenders alike will not learn a lesson and we'll be back to the same old game in a decade.

[zen]

I agree, people aren't responsible enough. However...

People are not all gurus, not all intelligent, not all resourceful, all knowing. A lot of people are naive. I don't mean people like the ones that maximize their cards and live lives that they can't afford - I mean some people rely on their broker/realtor/parents/whomever to help educate them, and they get 'sold' on whatever kool-aid they're given. They don't know better.

I'm not saying all people are that way, but not everyone understands, asks, or is not given a clear answer they understand. My experience has been a difficult one, because I go to a mortgage agent and am told I can afford X house, when I tell them I want Y house (X>Y). I insist I want Y, and they continue to push X. I get a preapproval letter, and approach realtors. They ask what my limit is =X because I was preapproved.

I insist =X continues with the "you can negotiate down to Y." It took a couple realtors and lot of complaining (on my part) to convince them I am looking for Y.

Not everyone else is willing to do that - they believe what they are told without researching it. They buy into the hype. Are they ignorant? more than likely. but I just don't like reading how it's either *ALL* the lenders/etc fault or ALL the borrowers fault. The blame is shared, they both took stupid risks and now they all are paying for it. Instead of a governmental intervention, why don't these lenders approach the borrowers and work something better out instead of a massive 'we want our money now, they want their house for free.' It's overgeneralized, I know, but that's the vibe I'm getting.

[Christian Finance]

I think it's more about the lack of financial literacy than anything else. A large portion of this country just doesn't know about money and haven't been taught or have learned on their own. This makes them vulnerable to these types of things like subprime loans or payday advances with huge interest rates.

In this case, what you don't know will hurt you. I think the blame goes to the people who are financially illiterate, the lenders for taking advantage of this, and the government for not regulating it more closely.

[Randy]

Folks that are losing their homes because of foreclosures are being punished enough for their ignorance. Do we really need to point and shout and tell them how irresponsible they are?
I don't believe in a bail-out, but I do believe in a hand up. As one poster noted, the math is simple for deciding if a loan is affordable. And as another posted noted, the pressures to sign on the line are very intense. What this tells me is that there should be a public information campaign for finance. Sort of like smoking. Noone thought about quitting until they understood the damage it can do. Now it is common knowledge.
Let's try understanding and education instead of blames and bail-outs.

[Paul Havemann]

The comments point up the reasons why there won't be a 'bailout'. The problem is that there's no way to be certain that we'd bail out borrowers who were allegedly duped by allegedly unscrupulous lenders, and not savvy investors hoping to 'flip' just one more house before the gravy train ended.

Just as 'there are no guilty people in prison' (as the saying goes), if the government started tossing money to the alleged victims, there wouldn't be one 'victim' who wasn't 'duped.'

[Lazy Man and Money]

Hopefully people will read this and think twice before they say things like "renting is just throwing money away" and "home ownership is part of the American dream." A lot of people (including many personal finance bloggers) write this and believe it. It leads to a situation where it does feel like there is a gun to your head (as Ciji says).

I'm not saying that people should be bailed out, but we should all do a better job to make home ownership sound like the road to financial success. It may have done well in the past due to a lot of appreciation, but who knows about the future? And the present isn't looking all that great.

[shadox]

Ciji, you made the right the decision. By bailing out people who decided to ignore the financial signs and go for that mortgage they couldn't afford, your own correct decision gets devalued.

After all, why make the right decision when you can knowingly make the wrong decision and expect the government to bail you out?

People that got into subprime mortgages should be allowed to accept the consequences of their decisions, except for in those few and rare cases where true fraud was perpetrated against them. Ignorance, stupidity and miscalculation cannot be permitted to be used as "get out of jail" cards.

[Lord]

Let's see. Nothing down, interest only payments, what do they have to lose but their good credit, ..oops, they didn't have that to begin with.

Someone did point out however that securitization may be making things worse by putting no one in charge to work things out.

[Dr. Artfredo C. Abella - Philippines SLU H]

Prevention is better than cure itself or simply an ounce of prevention is better than a pound of cure. Foreclosures are so heavily expensive that is true indeed, both parties must exert pressures, the creditor will use legal means which makes it more expensive, did you say that creditors even have to tuck a gun to enforce the collection that is weird but it happens sometimes to those who really want to get back their money. For the borrowers they have to defend their life and cling to the properties they could not pay for. This is why in the west foreclosures are being assigned to credit companies whose function is to collect bad debts. So creditors take the basics and look for the 3 C's before you lend your money to supposed borrowers - Character, Capital and Capacity to Pay. There are lots of banks whose main function is to lend their liquidity to loan borrowers in exchange for a collateral usually land. As the loan borrower could not pay, the bank must foreclose the properties of the loan borrowers but it has a repercussion, the bank gets the collateral and get tied to fixed assets thereby depriving them of liquidity which is cash, so by then the bank loses its current assets which is cash and then gets a better position in fixed assets which is land but loses its function to lend money to the proposed borrowers which deprives them of interest earnings though gets richer in other forms of assets. It's a cycle in business but always the creditor loses more if the loan borrower gets insolvent and could not pay his loans then it finally boomerangs to the creditor as he loses his liquidity to further use it in his business. Selling fixed assets like land takes time in the end both parties loses - the loan borrower because he loses his land and the creditor - bank because he loses his liquidity which is cash or current assets.