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Bailouts are going to reckless Wall Street bankers, to homeowners over their heads and now maybe even to Americans hooked on credit cards. Where's the reward in doing the right thing?
By Liz Pulliam Weston
If you feel like you're being played, you're not alone.
The financial crisis has deepened many people's suspicions that doing the right thing hasn't paid off. Instead, they feel it's made them chumps.
You see it in the "Where's my @#$%ing bailout?" T-shirts, the despair about plummeting retirement accounts and the hostile comments that greet every news story about mortgage restructuring or credit card forgiveness.
One reader put it this way:
"Doesn't keeping your promises mean anything? Most if not all of the people who snagged these (mortgages) were well aware of the risk and the responsibility. It kills me that I'm playing by the rules and bailing out those who were greedy, stupid or both."
Even when they're not directing their anger at anyone in particular, many of my readers feel like they've been led down the garden path.
"I am 62 years old and HAD been planning to retire in 5 years," one wrote. "Although I have lived frugally my entire life and put away 15% of my income every year in a retirement account, my balanced portfolio lost 60% of its value in the last two months."
What he wanted to know: Would he be a bigger fool for pulling his money out of the market now or staying in and possibly suffering more lumps?
If you have similar questions -- if you suspect you're being a chump for making your mortgage payments, paying your credit card bills and continuing to invest in your 401(k) -- read on. You're certainly not alone as you watch others exploit loopholes, mistakes and well-intentioned remedies.
Bailed out but still ruined
The question of why some homeowners are getting bailouts has really been answered by the financial turmoil of the past few months. A huge spike in foreclosures, magnified by derivatives cooked up by Wall Street firms, nearly brought down the global economy. As it stands, we're still likely to suffer one heck of a hangover in the form of a serious recession.
The foreclosure mess is far from over. Many of the riskiest loans -- the ones where homeowners weren't even paying all the interest that was accumulating on their loans each month, let alone touching the principals -- are just now resetting.
Then there's the whole vicious-cycle effect, which I wrote about in April. As foreclosures rise, banks slash the prices of the homes they recover, putting downward pressure on everybody else's property values. With more homes "underwater," more fall into foreclosure when their owners lose a job and can't sell, or simply decide to walk away.
That's why the Powers That Be are finally getting serious about working with struggling homeowners. Given how interconnected everything is in our economy, their success in saving your neighbor from foreclosure might ultimately reduce the chances you'll lose your job.
I agree that a lot of borrowers were complete idiots for agreeing to mortgages that were eight or nine times their incomes (a mortgage that was three times your income used to be considered a stretch in the days before lenders went nuts). Smart borrowers fixed their rates for at least as long as they planned to stay in their homes; dumb ones agreed to adjustable-rate mortgages on their brokers' assurances that they'd be able to refinance before the payments reset.
The federal government is considering a plan that would help about 3 million homeowners avoid foreclosure.
But borrowers didn't get these loans in a vacuum. Mortgage brokers and loan officers downplayed the risks. So did lenders, who gave the brokers and loan officers fat incentives to push them. The Wall Street machine encouraged looser lending standards and created exotic investment products that wound up multiplying, rather than reducing, the risks. Regulators, meanwhile, stood by and basically did nothing. No one involved is covered in glory.
Neither is anyone getting an entirely free ride. Plenty of people will still lose their homes, and many who get workouts will have to live with trashed credit from the payments they missed before help arrived.
Personally, I wouldn't trade places with any of them, not even the ones who'll wind up keeping the bigger, fancier homes my husband and I decided we couldn't afford. I wouldn't want to live with the anxiety those troubled borrowers have faced ever since they got unaffordable mortgages or the uncertainty they're feeling as they wonder whether a workout will save their homes. Those folks made a hell of a gamble, and even with efforts to help on the rise, most of them are still going to lose.
Give me a home bought with a fat down payment and a 30-year fixed rate any day.
So how about the people who may be about to get big chunks of their credit card debts forgiven?
Major credit card issuers are seeking permission to knock down troubled borrowers' debts by as much as 40%. Debtors would get preferential tax treatment as well; they wouldn't owe income tax on the forgiven debt until they'd paid off the remainder of their balances.
Credit card issuers are recognizing the obvious: that their free-lending ways have come back to bite them. Delinquencies are soaring, and issuers' charge-offs -- balances written off as bad debt -- are up nearly 50% compared with last year.
The issuers figure getting something out of these debtors is better than getting nothing if they stop paying or file for bankruptcy.
The number of people admitted to the issuers' proposed pilot program would be small -- about 50,000 -- although enrollments likely would rise if the plan worked as anticipated.
You might have a beef with this particular bailout if you faced a huge pile of debt and opted to pay it off rather than have it wiped out in bankruptcy.
But once again, I'd rather be financially responsible and conservative than not. I'm not sorry that we've always limited our credit card charges to what we could pay in full every month.
Maybe we haven't bought as many toys as the folks who carried debt and are about to have some of it forgiven. But we also haven't spent a fortune in interest charges, which those people certainly have.
And I seriously doubt I'd have to pay higher interest rates or suffer in any way from this program, even if it became wildly successful. Those of us with good credit still would get the best rates, as I explained in "The real victims of deadbeats? Other deadbeats!
How about the last station on the have-I-been-a-sucker line: investing. Surely we were sold a bill of goods when we were told stocks are a good long-term investment. Haven't they gone essentially nowhere for a decade now.
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