Intersecting Minds: Education, Business and Technology at the North Carolina State Jenkins Graduate School of Management

More Foreclosure Plan Thoughts | February 21, 2009

Clive Crook delivers an elegant analysis of the foreclosure plan. I did want to highlight one paragraph that illustrates some of the arguments I’ve been making here about deserving and undeserving recipients of aid:

“The administration says that its scheme does not reward people who recklessly borrowed too much. This is untrue: the plan will certainly help some people who borrowed more than they should have. No doubt, it would be fairer to help only borrowers whose standard repayments (after teaser rates expired) were no more than say 30 percent of gross income to begin with, and/or who borrowed less than 80% of their property’s initial value–in other words, to help only borrowers who behaved prudently, and who are now in trouble because their income has fallen. But of course this would have meant many more defaults. Because foreclosures also hurt innocent bystanders, there is a public interest in limiting them. The second part of the plan, I think, is indeed unfair and does raise moral hazard concerns–but I’d say that is a price worth paying if it stems the tide of foreclosures.”

Of course some people will receive aid who don’t deserve it. But here’s the key question? Would you rather reward some people who don’t deserve it and ensure less overall suffering? Or would you withhold all aid and watch as another 5-10 million houses get foreclosed upon and have everyone suffer the economic fallout?

If the economy were in a better spot, and the housing crisis was our only concern, I’d be tempted to agree with my friends who oppose the foreclosure bailout plan. People DO need to take responsibility for poor decision making, and normally we would want to let the market work out its issues unfettered by government intervention. However, adding 5-10 million foreclosures to an already depressed economy hindered by both an unemployment and credit crisis is akin to throwing gasoline on the fire. Something needs to be done to dampen the flames, and this plan is a strong step in the right direction.

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