Dec 062007
 
Authors: Ian Bezek

The Bush administration, already under fire for numerous unpopular and failed policies, unveiled a new unconstitutional initiative on Thursday to help ailing homeowners.

The value of houses in America has fallen sharply over the past year. This, combined with rising interest rates, has caused many borrowers to default and 198 lending institutions to go bankrupt.

Bush’s new plan, dubbed Hope New, seeks to help homeowners feeling the squeeze.

A highlight of the plan is the freezing of interest rates on adjustable-rate mortgages for borrowers. Freezing interest rates would stop people’s monthly payments from increasing — the cause of most mortgage defaults.

This sounds nice in principle. However, this proposal is unconstitutional under the Fifth Amendment and violates basic contract rights.

It is well understood that when a contract is signed, in this case between a bank and a homeowner, it gains the force of law. After having signed a contract, you can’t renege on it without facing harsh penalties.

The idea that the government can just swoop in and declare thousands or millions of mortgage contracts null and void is laughably preposterous. This proposal would both fundamentally damage the idea of private property ownership and cost taxpayers greatly.

Even if this proposal were constitutional, it is doomed to failure for two reasons.

For one, investors will be scared out of loaning money to future homeowners with less than perfect credit. This reluctance would especially impact those of us who are young and have little credit history.

Banks know that if we can’t pay our debts, we will just go whining to the government and the government may choose to ease our obligations. In this situation, banks might never lend us another cent again.

Once the government invalidates the terms of one loan, it will be tempted to invalidate any loans where the borrowers can’t pay. Since more of us are debtors than creditors, the debtors will have more votes, and the people with money will be scared to lend it for any reason – which would be disastrous for the economy.

The other problem with this initiative is that it doesn’t even solve the housing problem it seeks to address. Most ailing borrowers are in way over their heads and are not going to be able to pay their debts, even with a frozen monthly payment.

While I feel bad for the ailing homeowners, it is not right to bail them out just because they wanted to live beyond their means. It is the homeowners’ responsibility to know whether they can afford the payments.

In many cases, borrowers paid no down payment and fork over up to 40 percent of their monthly income for a house they can’t afford. This kind of thinking demonstrates an incredible lack of judgment, but has been played out countless times over the past couple of years.

For the individuals involved this is a personal crisis, but on the national scale, this is just a normal occurrence of the free market.

Home ownership is not a right, it’s a privilege. People have the choice to buy a home, or to rent a residence. There is nothing wrong with renting, and if you can’t afford a home, you shouldn’t try to buy one anyway.

Where will all this lead? Lending institutions will continue to be hurt.

Luckily for them, the government is discussing a bailout for them as well. The loser, of course, is the taxpayer who has to pay for the government’s rescue efforts.

Another bailout, especially an unconstitutional one, will not solve the economic crisis, while it would encourage a spiral of further misguided financial decisions in the future.

Ian Bezek is a sophomore economics major. His column appears occasionally in the Collegian. Letters and feedback can be sent to letters@collegian.com.

 Posted by at 5:00 pm

Sorry, the comment form is closed at this time.