If You Cannot Afford The House, You Should Lose It

Apparently President Bush and mortgage lenders have worked out some deal in which lenders would freeze the interest rates of some borrowers whose mortgage interests are about to reset to higher rates. The deal is to prevent further foreclosures because those borrowers who stand to benefit would not have been able to pay the higher interest rates.

The move is wrong. It is just another example of government trying to protect people from themselves. Although the deal is said to be voluntary, that seems doubtful. What is more likely to have transpired is that the mortgage industry was threatened with legislation or congressional investigations, and thus the industry caved under the pressure.

How did we get to this stage? In recent years, it became much easier for people to secure mortgages. There were programs that offer 100% financing with no income or savings verification even to borrowers with spotty credit records. Add to that the lure of very low interest rates which made initial monthly payments affordable. But buried in the documents at closing were the disclosures stating what the interest rates and payments would be in two, three of five years. Borrowers reasoned that they would be able to make those payments, when they did read the documents, or simply did not read the documents. In either case, borrowers are responsible.

But should some blame go to those who were responsible for relaxing the rules for securing mortgages? That answer might seem to be yes, but borrowers should still have been able to honestly assess their situations to make intelligent decisions. If they did not have the knowledge to do so, they should have sought representation.

The more serious issue arising here is that contracts have been ignored at the behest of the government. Will this set a precedent in which businesspeople will be reluctant to enter into contracts because of fear that government intervention in the future could void those contracts?