The following article expresses opinions on the recent political proposals to offer homeowners funds to help borrowers who are or will soon be facing foreclosure. This addresses the question of should the many pay for the mistakes of the few who may have been irresponsible in taking out loans which they could likely not afford.

With election season in full swing, politicians of every party and persuasion are falling over themselves to propose ways to remedy the millions of people adversely affected by the dramatic shift in housing and credit markets. Sen. Hillary Clinton, for example, has proposed the establishment of a $1 billion fund to help states help borrowers who are in danger of foreclosure.

Most people with even a cursory knowledge of free market economics understand that governmental interference doesn’t alleviate problems; it simply makes them more severe and longer lasting. If someone can’t afford to pay their mortgage, certainly the government paying it for them for a few months isn’t going to make any meaningful difference.

In reality, it simply distorts the rational allocation of assets and ultimately drives up costs for both lenders and borrowers. The negative byproducts of governmental intervention in a free market are well documented, and were most recently seen in agriculture, where massive subsidies for ethanol production have led to skyrocketing corn prices.

But the real reason to oppose a bailout isn’t that it’s impractical, but that it’s immoral.

To live freely means to act in accordance with your own rational beliefs and to accept the consequences of your decisions, no matter how unwise they might seem after the fact. Those individuals who made financial commitments they can no longer afford to honor have no right to demand taxpayers bail them out. In America, we have the right to “life, liberty and the pursuit of happiness,” but not the guarantee we can live in the four-bedroom Colonial that’s priced way beyond our means. It might sound cold, but homeowners who can’t pay their mortgages should not expect to be able to keep their homes.

As traders, we are unquestionably comfortable with this sort of personal responsibility. If we make poor investments and lose money, we certainly don’t expect the government or anybody else to bail us out.

But Americans, especially many populist politicians, believe that individuals deserve to have their mortgage paid simply because they can no longer afford to pay it themselves. Forgetting the fact that these individuals willingly took out loans well beyond their means or didn’t plan for a rainy day in which the real estate market wasn’t soaring, politicians on both sides of the aisle say they are entitled to keep their home. So they plan to take other people’s hard-earned money and give it away…not because these individuals did anything to deserve it, but simply because they need it. It’s the essence of the “entitlement mentality” I wrote about last winter.

The purpose of government is to protect my rights — end of story. But because there is no such thing as a right to a home, using taxpayer dollars to bail out homeowners or home lender, is an immoral abuse of governmental authority.

Those who advocate for such measures tend to think with their hearts instead of their heads. When challenged about the morality of such schemes, they usually present a tragic example about a down-on-their-luck Rust Belt family who are in danger of being evicted from their home. Dad lost his job at the plant, mom is on dialysis and takes care of the kids, all of whom desperately need braces and new books for school. The argument is always an emotional one: “Don’t you want to help poor people in need?”

But a government bailout is not charity — it’s coercion. Americans are incredibly charitable people, last year donating a record $295 billion. But when you donate to Habitat for Humanity, for example, you do so voluntarily, deciding how much you’d like to give and to what particular cause. When Hillary pledges $1 billion in financial aid for homeowners, however, it’s not her money; it’s the taxpayers’, many of whom would undoubtedly prefer to give to any number of other deserving recipients.

The other tactic used by proponents of a bailout is to demonize the banks and mortgage companies for making “predatory” loans to financially unstable families, as if somehow loaning someone money is harming them. What’s ironic is that for years, elected officials chastised businessmen for failing to offer loans to people with poor credit. After the private sector stepped up and many billions in loans to lower-income families, many of those loans are not being paid back, and those same businessmen are being criticized for making the loans in the first place. Indeed, businessmen are the scapegoat either way.

The more the government gets involved in mortgages and banking, the tighter credit will become. But beyond the impractical reality of collectivist economics, a bailout of homeowners facing foreclosure would be an immoral violation of the property rights of the millions of citizens who live within their means and pay their bills on time. The responsibility of paying back subprime mortgage rests with those who took them, not the publicity-seeking politician eager to sacrifice the individual for the “public good.”

The article below speaks to the loosened credit standards put in place by American Home Mortgage for higher risk borrowers which worked out to be a lose-lose situation for a high percentage of loans that were issued.

American Home Mortgage took a gamble, just as many of its customers did, and lost. And just like many of those customers, the company found itself in a bankruptcy court last week.

The difference is that it will be up to the court and creditors to decide if the company survives. It appears, however, that a government bailout may be in the offing for individual homeowners who thought they could outrun their poor credit histories and ratings.

In the wake of last week’s bankruptcy filing by American Home Mortgage, presidential candidate Hillary Clinton wants to mount a federal bailout.

As reported by The Associated Press, Clinton is calling for penalties on unscrupulous mortgage brokers who engage in predatory lending and a $1 billion federal fund to help homeowners avoid foreclosure.

Clearly, as news reports have shown, some would-be homeowners were taken advantage of — some innocently, some intentionally and some of their own accord. The problem is telling the difference between those hoodwinked and those who knew they were taking a risk (putting aside momentarily whether the government has any obligation beyond the bankruptcy and criminal court system to get involved).

The primary reason American Home Mortgage and individual homeowners have been forced into bankruptcy is that they took too great a risk.

AHM officials thought they could make home loans to credit-questionable consumers. Consumers, many of whom knew they were taking a chance, played the long shot and lost at the rail.

Company officials staked their fortunes on the bet that enough customers would buck their credit histories and insufficient incomes. The equation was simple. If enough mortgagees made their payments at inflated rates, they would cover those who would default.

You win some; you lose some. But in the end there is a net gain — or so the theory goes.

It’s much like credit card companies which charge 20-plus percent in order to cover losses of customers the company statistically knows will default.

But all the blame does not rest with AMH. With all the emphasis placed on credit ratings today, a potential mortgagee would have to be living in a cave without a radio or television to not know enough to check their credit report when applying for a loan.

It is these credit reports that determine whether a borrower gets favorable rates or has to pay more because they are a financial risk to the mortgage company and themselves.

Clinton implies that a significant portion of those with these high-risk loans were taken advantage of — a questionable hypothesis.

But even if she is right, establishing a government slush fund that sidesteps the judicial system is not the way to go. Democrats have been like flies on flypaper in criticizing the Bush administration for fraud and waste in the wake of Hurricane Katrina and federally funded recovery efforts.

How in the name of all that is holy, does anyone expect Uncle Sam to get it right this time?

And what about Clinton’s call for tougher laws that will draw and quarter offending mortgage brokers? While some may be needed, no proof is offered that stronger enforcement of existing laws won’t accomplish the task.

Are there individuals who need help? Yes. Are there families whose life savings went up in smoke due to no fault of their own? Probably.

But a $1 billion government bailout is hardly the answer.

There is a court system in place to do much, if not all, of what Clinton wants done. And there are laws that apply, injunctions that can be filed, and class action lawsuits. Fraud is a prosecutable offense. If local district attorneys need more resources, then perhaps the public coffers should be tapped. Ditto, if more criminal investigators are needed.

But to open the candy jar and let anyone with a complaint stick their hand in is to do a disservice to those with good credit ratings and who borrow responsible amounts.

But then, there is a presidential election just around the corner, and nearly everyone loves candy.