As the foreclosure crisis has only grown worse by the month, and large banks are in danger of collapsing, the focus of government appears to be focused on helping homeowners save their homes from foreclosure. The government has stepped in with a number of different policies and programs that are designed to help people suffering from the foreclosure crisis. With most of what government does, though, the people who are designed to benefit are actually being hurt, while the parties who are most responsible for the financial crisis are socializing their losses.
The real estate bubble was inflated beyond all reasonable expectations of value at an increasing rate once the Federal Reserve lowered interest rates in an effort to avoid a recession after the crash of the dot-coms and the 9/11 terrorist attacks. Rates were lowered to below one percent, and people were encouraged to cash out home equity or buy a new home. Even people with poor credit were able to get mortgages for relatively low rates, and they took advantage.
Banks looked the other way during this boom, as many of the people setting lending guidelines were just as taken in by the low rates and rising values as everyone else. Hedge funds on Wall Street were only too willing to purchase bundles of these loans and were confident they would make money even on foreclosures. Home values were rising and people were buying as quickly as they could, which meant the inevitable foreclosed house could be sold for a profit.
But once the general awareness of the low quality of these loans spread throughout the economy, and property values stopped increasing, the entire house of cards began to fall. Unfortunately for those homeowners who made prudent decisions and did not take advantage of the run-up in prices, the large number who were facing foreclosure helped drag property values down even further. A likely response has been the calls from homeowners, concerned interest groups, and some politicians for a federal government bailout of homeowners.
The message of providing help directly to foreclosure victims has been much more widely spread through the media than any description of the actions being taken by the government to bail out the banks at the expense of homeowners. First of all, the Federal Reserve has been creating new money out of thin air to give to the banks. The central bank has been injecting tens of billions of dollars into the financial system and are even considering about $200 billion more in the near future.
However, direct injections of liquidity have so far failed to stimulate the economy. So now the Fed is left to its favorite tool of inflating the money supply and causing the dollar to fall in value. The price of goods like food and energy are going up dramatically, which hurts the people who need to eat and go to work in order to pay their mortgage. But it bails out the banks and helps them cover their poor lending practices. Of course, this is a reflection of the fact that the banks are infinitely more influential in Washington than the average person, especially an average person too busy trying to stop foreclosure to worry about what is going on in politics.
HOPE NOW and Project Lifeline are two voluntary programs the government has put together and presented as a saving grace for homeowners facing the loss of a home. Essentially, the programs are nothing more than media relations programs where a handful of major banks in the country are voluntarily offering homeowners various programs to save their homes. This might be through repayment plans or loan modifications, or freezing the interest rate for a set period of time. But these have always been offered to homeowners who can qualify for them — putting a fancy new name on them does not change what the programs actually do.
Thus far, these have been the only responses from the government in regards to the foreclosure crisis. Although it would probably be better that they stay out of the situation entirely, the Federal Reserve continuing to inflate the money supply and manipulate interest rates will have unintended consequences for homeowners while benefiting the largest, most politically-connected banks. Monetary bailouts and voluntary programs for the banks. Inflation and currency collapse for homeowners.
Homeowners attempting to find some way to stop foreclosure would be better off trying to negotiate with their banks right now and trying to work something out, even if just for the short term. This will more than likely result in a much better chance to avoid losing the house, rather than waiting for a different government program to save them. For example, there are some proposed changes to bankruptcy laws that may allow courts to lower the total amount owed on the mortgage to reflect current market conditions, but nothing is set into law yet and certain members of Congress and the banking industry will probably be successful in blocking the changes, as they benefit people instead of corporations.
From changing the bankruptcy laws in 2005, to manipulating interest rates from 2001-2006, to injecting tens of billions of inflated dollars into failing banks, much of what government purports to be helping the average person instead only serves to take what little money they are allowed to keep after paying taxes. The temptations of the easy credit conditions fostered by the government that inflated the housing bubble does not absolve homeowners of their individual responsibility to educate themselves on how mortgages work and what may happen if the good times did not continue. But it is not surprising that some of them also took advantage of these conditions to profit in the short term, while setting themselves up for a financial collapse down the road.
About the Author: wahm