In the midst of the financial crisis, I think we’ve lost sight of the real victims here–people trapped in a housing debt prison:
…they were counting on increasing income and increasing home prices to finance their lifestyles and their family’s future. It isn’t going to turn out well for them.
Even if these people get a workout that allows them to stay in their homes, the terms of the workout are not going to leave them much to live on. Any workouts are going to have the highest possible DTI the government thinks you can handle (currently 38%,) and to qualify for the workout, the homeowner must give up half their future appreciation — if there is any. Most would be better off walking away. Anyone paying 38% of their gross income (that is gross not net) to their housing costs, plus trying to finance car payments and credit card debt is going to find it very difficult. This is not going to be a short-term condition… Many of us have had to tighten our belts during the recession, but these people will not see any improvement in their finances when conditions improve….
The pwned group is facing a life of indentured servitude to massive debt obligations and little or no hope of financial recovery. Those that lost their houses will have to deal with bad credit and feelings of failure. I can’t decide which group I would rather be in. Neither alternative is very enticing. I am very thankful I was one who did not participate.
While many will blame the people in this situation, and argue they should have known better–and many ‘ordinary’ people did know better–I think many people aren’t financially sophisticated enough to have known better. I don’t mean this as a slight–there are plenty of things I don’t know about or keep up to speed on. But one reason that arguments about broadening ‘economic choice’ fall short (e.g., health insurance) is because the assumptions and knowledge needed to make a good choice are often lacking. Combined with wishful thinking and willful ignorance, this can be a toxic mix. Fewer options, especially when failure is a disastrous option, is not necessarily a good thing. Most people don’t want to be financial wizards, as hard as this may be for some to believe.