Reflections on the Subprime Mortgage Bailout

Q: In "I Couldn't Help It. I Can Resist Anything Except Temptation.", Austin wrote about the origins of the subprime lending crisis. What are your thoughts on the recently announced government bailout plan?

A: We've written quite a bit about the recently announced bailout plan in the SMI Editors' Weblog . If you're not checking the on-line Weblog at least occasionally, you're missing a lot of discussion about current financial issues like these. The Weblog allows us to talk about issues/events as they occur, when they're fresh and "in the news."

Here's a very brief recap of our thoughts:

Admittedly, the subprime situation is a serious problem. It's not a good thing for our financial markets to seize up as they started to this fall. That said, a bailout like this, where the government has pressured lenders to freeze artificially low teaser rates on certain adjustable rate mortgages, creates a whole set of other problems. People learn from past behavior and experience. If home buyers and investors alike learn that they won't reap any negative consequences when they take on too much risk, it encourages more reckless risk-taking in the future. It's a distinctly bad thing with its own fancy title—moral hazard. It's the pain of loss that keeps certain negative behaviors in check.

It may seem that this bailout is a "victimless crime" since taxpayers won't be on the hook. But investors of all stripes are going to be hurt here, as contracts that called for one set of conditions are now going to be changed to another. And don't believe the spin that these investors are fat cats smoking cigars somewhere. The reality is this mortgage debt is everywhere—in regular mutual funds, 401(k)s, the pension funds of teachers, firefighters, state employees, etc. It should be very disturbing that these contract terms can be changed like this simply because they've become unpleasant enough for people who willingly took one side of the deal.

This type of bailout seems unfair to those who took a conservative approach to the housing market in recent years. People who tried to act responsibly by buying smaller homes, using more expensive fixed rate mortgages, saving and waiting, and practicing other "old-fashioned" virtues have been penalized with higher mortgage rates across the board. Those who waited for the housing market to correct will now see home prices artificially propped up as these subsidized loans don't fail.

It can be tempting to see only the injustice in a situation like this. A Christian worldview, supported by passages like Psalm 73, can help counter that feeling. Consider how those who didn't get sucked in to the housing bubble and subprime lending crisis have benefited by staying true to biblical financial principles:

• They haven't spent the past 6-12 months wondering how they can possibly meet a mortgage payment that they never expected to pay. After all, many of those who took these subprime loans expected to refinance before the rates reset, only to find themselves unable to when the mortgage market virtually dried up this year.
• They haven't been wracked with anxiety and fear as the housing market turned and they had to contemplate trying to sell their new home for less than they now owe on it.
• They've potentially been able to benefit as the market has swung back in their favor, getting a stronger selection of houses in a buyer's market, plus being able to make a stronger offer due to their increased savings.
• They've had peace of mind knowing that however the financial "numbers" turn out, they did the best they could to follow the biblical principles involved.
• Someday they're going to hear the Lord's "well done" as He reviews this area of their faithfulness as stewards. And in that moment, all the other considerations are going to vanish.

Don't ever believe that you get ahead by acting in a financially irresponsible manner. If you're inclined to see the injustice of a bailout like this, take a deep breath and consider the bigger picture. It may seem for a season that the irresponsible prosper while there is little reward for the righteous. But we can have every confidence that in the end, the Lord who is perfectly just will right the wrongs and balance the scales.

• "I Couldn't Help It. I Can Resist Anything Except Temptation."
• Exhibiting Prudence When Purchasing a House 
• How to Deal with a Personal Financial Crisis  
• SMI's Mortgage page

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