NPR article: Subprime Bailout: Good Idea or 'Moral Hazard'?

By
Real Estate Agent with Keller Williams Realty-Boca Market Center

I found this interesting article on the NPR website.  Should we as taxpayers be bailing out a homeowner that got in too far and borrowed more than they could afford?  Is it their fault that the housing market collapsed just as they were starting to invest in real estate? 

Or should we be bailing out the sub prime lenders and financial institutions that made these crazy no money down loans?  After all, if they collapse or go bankrupt it could harm the economy as a whole.  We are already teetering on a recession as it is. America's subprime lending crisis could become a global problem as the loans are bundled and sold to hedge fund investors all over the world.

Or would this just be, as they say, rewarding risky behavior or as the Wall Street Journal calls it, a 'Moral Hazard'?  If your risky investment fails, and then the taxpayers cover your losses, then I guess that would make it a safe investment!

Comments (7)

Adam Brett
The Adam and Eric Group - Fullerton, CA
The Adam and Eric Group, Fullerton's Finest
Neither.  Let the cards fall where they may.  We never see a bailout for people in the stock market, cars, or really any other commodity.
Dec 30, 2007 12:45 PM
Eric Kodner
Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN
Wayzata Lakes Realty: Twin Cities, Madeline Island

It is foolish and shortsighted to try to "punish" people for getting drawn into the housing market debacle.  If a bailout becomes necessary to save the system (and serve the greater public), failing to take steps would be pretty stupid.

It's very simple for those who are in good shape financially to wag a finger at those who aren't.  As you wrote in your post, if things become bad enough "it could harm the economy as a whole".  What benefit are we going to derive from sitting on our hands and doing nothing?

I just don't think the world is as simple as some people view it.  Foreign investors in US mortgage-backed securities are watching us to see how we handle this.  Our credibility and the liquidity of our securities in the international marketplace is at stake, among other things.

Dec 30, 2007 12:51 PM
Josh Austin
Corona Real Estate - Star, ID
If the housing market were healthier would there even be any talk of bailing out the lenders or the borrowers?  Probably not.
Dec 30, 2007 12:53 PM
LaNita Cates
REMAX of Joliet - Joliet, IL

Adam is 100% correct.

Dec 30, 2007 01:09 PM
Mark Doran
Keller Williams Realty-Boca Market Center - Delray Beach, FL

Adam,

You're right, we don't see bailouts of individual investors but we do have corporate bailouts, as in the 'Savings and Loan Crisis' which contributed to huge budget deficits of the early 90s. 

Which would be worse to the economy, a Federal budget deficit or major financial institutions going bankrupt?

Dec 30, 2007 01:18 PM
Eric Kodner
Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN
Wayzata Lakes Realty: Twin Cities, Madeline Island

Mark, you're absolutely correct.  We all remember the Chrysler bailout, among others.  And the S&L crisis was another example. 

I think some people take the very simplistic view that government should always punish profligacy and reward frugality.  But when it comes to bailing out corporations, our elected officials seem to rush to answer the call like Pavlov's dogs, salivating like mad when the bell rings!

Dec 30, 2007 01:24 PM
Eric Bouler
Gardner Realtors, Licensed in La. - New Orleans, LA
Listening to your Needs
Its an investment in a market. It is all going to depend on how the investors can manage their foreclosures. The investors are so far removed from the homes it is hard to know what they have. The attorneys should make out like kings when all is said and done.
Dec 30, 2007 01:25 PM