Shouldn’t Uncle Sam bail out homeowners, too?

John W. Schoen Senior producer • Profile • E-mail

Last week’s government bailout of Fannie Mae and Freddie Mac has left some readers wondering: What about the millions of families who have lost their homes — or are still at risk of foreclosure? Isn’t the government going to do anything to help them out, too?

If the taxpayers are going to bail out Freddie and Fannie, wouldn’t it be fair to convert all the (adjustable-rate) mortgages into 30-year fixed-ate loans and let the market reboot itself? It doesn’t make sense to reward the establishment that placed so many into ARM loans and then ask those with ARM loans or who just lost their homes to spend upwards of $50 billion to save the robbers. Both sides in this equation should get the benefit of the bailout.
— Dennis, Port Orchard, Wash.

The issue of just who should — and shouldn’t — get bailed out has been a central theme in the ongoing debate about just how government should respond to the collapse of the housing bubble and resulting credit bust. Unfortunately, there’s been little agreement, from the White House to members of Congress to the Federal Reserve to voters and readers.

The argument against bailouts is that it rewards bad behavior — or at least bad financial decisions. If you go to the casino and lose money, you don’t expect the government to cover your losses. (True, Uncle Sam expects to collect a piece of your winnings, but we’ll leave the debate about tax policy for another column.)

The problem with letting Fannie and Freddie “pay” for their past mistakes is that we would all pay. And no matter how much the government spends cleaning them up, the tab would have been a lot higher if these two giant companies were allowed to default on their debts.

No one can say for sure exactly what might have happened, but a default would almost certainly have scared off investors who put up money for new mortgages, sending borrowing rates much higher. The Treasury would have had a harder time siphoning up the global capital needed to fund our government’s habit of spending hundreds of billions of dollars more every year than it collects in taxes. That’s not exactly what the housing market or the economy needs at the moment.

But it’s fair to say the government has been quicker to help lenders and investors than it has been to help homeowners. The massive rate cuts by the Federal Reserve are perhaps the biggest bailout to date; by lowering the cost of money, the central bank has boosted profits for lenders to help them cover the losses from all the bad loans they made.

As for homeowners who are now losing their homes, Congress and the White House spent more than a year debating what to do to help them. The housing bill passed this summer will help some. But converting adjustable mortgages to fixed-rate loans won’t help those whose houses are now worth less than the balance on their mortgage. Some people now falling behind on their payments simply couldn’t afford the house to begin with. Converting their loans to fixed rates wouldn’t help them much either.

The argument against government “bailouts” is still alive and well. And judging by the government's refusal to stabilize Lehman Bros., prevailing. A $30 billion backstop last year helped close the sale of battered Bear Stearns to JP Morgan. But with the Treasury still sorting through the potential cost of the Fannie and Freddie bailouts, there seems to be little interest in adding Lehman to the list.

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