There is an undercurrent of disatisfaction that is surfacing regarding the rescue of homeowners who got themselves into bad mortgage arrangements. Talking heads like the guy on CNBC are going off about how wrong it is that citizens who were more clever about their spending habits should have to pay for the mistakes of those who made bad choices.

As a first order approximation, it is hard to argue that we should line up to provide this payout.  If you make bad judgments based on greed, ignorance, or simple miscalculation, the theory is that in an ideal free market you should be free to suffer the consequences as well as the benefits.

That’s fine. Except that we do not have an ideal free market.  In this particular bust, the risks of mortgage trading were not accurately communicated to investors or even particularly well understood by anyone. The macro effect of a large number of mortgagees who are suddenly unable to deal with a large interest rate uptick in their adjustable rate mortgages (ARM) was under appreciated by most.

Adjustable rate mortgages and the subsequent investment instruments that followed were dreamed up by somebody- but probably not by hourly workers or anyone outside real estate and finance. There was a kind of wink-of-the-eye understanding between banks, mortgage brokers, builders, and the real estate business. Not only was there the invention of the ARM and the degradation of qualification standards, there was a nationwide marketing campaign aimed at marginal buyers. This real estate boom was financed in part by mortgage instruments designed to capture marginal borrowers.

The previous owner of the home that I presently occupy was a mortagage broker who had hit the big time at the start of this bubble.  After the signatures were on paper, he told his wife that she could have the BMW that she had wanted from the equity.  Mortgage brokering was practically a cottage industry and many people were making money.

Real estate agents knew this of course. They knew that easy qualification was available and they continued to do what they always do:  push buyers into the most home they could afford.  It was a sellers market and real estate speculation was rampant. Builders were routinely putting up spec homes and selling them like hotcakes.

This is not just a problem limited to greedy buyers. A whole business phenomenon grew into being around the housing boom. Lending institutions, mortgage brokers, real estate brokers, title companies, builders, and buyers all bought into a dream built upon sand. Buyers may have been guilty of bad judgement, but it was facilitated by entire industry ready and willing to make it happen.  

So, are the angry men we see on television justified in their assertion that they should not be forced to help bail out those facing foreclosure? I suppose the position you take depends on your vision of what civilization should look like. I think  if you investigate the self-righteous self-made, you’ll find that many of them benefitted in part by the distribution of wealth at some scale. Inheritance money, Pell grants, scholarships, good mentoring, good fortune, talented parenting, and many other forms of benefit that are not necessarily distributed by bank deposit. Simple hard work is rarely enough.

The parties involved in this fiasco should bear the brunt of it themselves to a large extent. That means that lending institutions should not be entitled to the profits they were anticipating and the borrowers should not be entitled to large equity on overvalued homes. There should be suffering on the part of all participants.