Economics

Bad Credit, Missed Payments, Imminent Foreclosure? No Problem!

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How sympathetic should you be to people who took advantage of bargain variable-rate mortgages and are having trouble making their payments now that their rates have risen? That depends, in part, on how much of a hard-ass you are when it comes to expecting people to read the fine print and understand what they're getting into before they sign a contract. (Leave aside, for the moment, the possibility of outright fraud by lenders, for which there should be some sort of legal remedy.) But even if you feel bad for families facing foreclosure now that the prospect they didn't want to think about has come to pass, does it seem like a good idea to encourage such carelessness? That's what the state of Massachusetts is about to do, by refinancing the mortgages of families who might otherwise lose their homes. Under the $250 million plan, variable mortgages would be converted into 30-year loans at a fixed rate of 7.75 percent. When the value of a home has declined since it was purchased, the state will force lenders to take the loss, covering an amount equal to the current market price. Unless I'm missing something, such strong-arming probably won't leave lenders worse off than they would otherwise be, since if they foreclosed they would have to take a loss too. But the state will be putting taxpayers on the hook for defaults by homeowners who are disproportionately bad credit risks and have already shown they have trouble making payments. Worse, it will be encouraging other would-be home buyers not to worry much about the fine print, since if worse comes to worse the state will bail them out.

[Thanks to Michael Graham for the tip.]