Who Is Accountable For ‘Underwater’ Homes?

By  //  April 27, 2012

Politico-Economic commentary

(VIDEO: Fox 29 Good Day Philadelphia Video)

BREVARD COUNTY • COCOA, FLORIDA — Not surprisingly in this election year, President Obama is offering yet another bailout for distressed borrowers who owe more money on their homes than they are worth.  In other words, people who can’t afford their homes should be allowed to keep them at the expense of their neighbors.  The administration is actively pushing banks, as well as Fannie Mae and Freddie Mac, to write down the amount certain underwater homeowners owe.

(Shutterstock image)

But remember that the money they received from the lender to buy or refinance that house was real money. It was money due to be paid back to the lenders.  A key point to remember is that the money lent did not actually belong to a “bank,”  it belonged to bank depositors.  People like you and me.

In Reality, You’re The Lender

To make it easier to understand, let’s suppose all the bank did was match up borrowers and lenders.   When a home buyer wanted to borrow $50,000, the bank matched them up with one or more bank customers, so that each CD at the bank was actually directly dependent on repayment of the mortgage to be paid.  If the borrower stopped making payments, the bank customer(s) would not get paid.

Are you willing to throw a personal life preserver to save "underwater" homes? (Shutterstock image)

The only difference with the bank doing the paperwork is that the connection between the people who actually furnished real cash and the borrower who received real cash is not as apparent.   So bottom line, if the government requires a lender to write down the principal that is owed, the actual person who deposited the money in the bank is the one who will get hurt, or if the bank uses its own money, it will have to come out of money that really belongs to bank shareholders.

Home Used As An ATM

While I can support helping people who through truly no fault of their own–they had health insurance but it didn’t cover all their expenses, or who had an emergency fund but unexpectedly lost their job and their emergency fund had run out before they could sell their home, etc–were unable to afford their current home, what I find absolutely an insult to the majority of Americans who did not buy homes they could not afford, who did not use their home as an ATM machine to pay for vacations, new cars, and other fun things, is for the government to hand out tax dollars to people who did just that.

According to what I’ve been able to determine, it is a federal felony to lie on a financial statement.    But it seems no one in government wants people who lied on a mortgage application to be held accountable for committing what is essentially, fraud.

Common Sense Example

Imagine these two situations: Both the Smiths and Wilsons have a home that during the boom years had a market value of $250,000 and a mortgage of $125,000.  The principal and interest payment for each was $1200 a month.   Both had extra income of $1000/month to save or spend.

Both Mr. and Mrs. Smith each put $500 into their IRA’s every month.   The Wilson’s took out a $100,000 second mortgage that cost them $1000/month.   Both worked at the space center and knew their jobs could be eliminated within 5-10 years.

There is good reason to be skeptical about the government’s latest program, which would take taxpayer money out of TARP and be used for writing down the principal owed on mortgages. (Shutterstock image)

In 2008 the Smith’s IRA dropped by $25,000, and the market value of the Wilson’s home dropped by $75,000 down to $175,000, but they now owe $225,000, and while they could have afforded the original $1000/month payment, they cannot afford the current $2000/month payment.

No one is offering to give the Smiths the $25,000 their IRAs lost.  Why should the Smiths or anyone else be required through taxation to subsidize the bailout of the Wilsons?

If someone stopped making payments on a car, that car would be quickly repossessed and few would argue that was fair.  Why is it that the same thing should not apply to someone who knowingly bought a home they couldn’t really afford, or used their house as an ATM machine to take out cash, but now can’t afford to honor the payments they agreed to make?

Can America survive if those who make poor financial decisions are protected by the government and ultimately make someone else pay for their mistakes?


Ilene Davis, CFP

Ilene Davis, a resident of Brevard County since 1971, is a Certified Financial Planner with a bachelors degree in Mathematics from the University of Michigan, a bachelors degree in Accounting from Rollins College, and a Masters in Business Administration from Webster University.  Ms. Davis became a stockbroker in 1982, earned her designation as a Certified Financial Planner in 1984, and with a desire to serve clients more on her own terms, opened her own financial consultant office in Cocoa Village in 1986.   She is committed to helping each client create their own “Financial Freedom Fund,” and believes strongly in free market capitalism and a “hand up rather than a hand-out” as the best path to prosperity.



  1. For many years when we would drive around Titusville we would see these big houses built, two big cars, a boat, etc and two or three small kids running around. We would just shake our heads and wonder how in the world they can afford all those things.

    We all knew the Cape was coming down, some of us saved, some of us had to take jobs out of the state but we seldom went in debt, not even for a car. We were comfortable and enjoyed life within our means. Now those other people are asking me to help them out because they can’t afford all the luxuries. Baloney, get rid of them, don’t blame me or the government for your bad judgement.

    I worked in construction where 18 months was a long job, but I was always planning for the time between jobs. I didn’t max out my credit cards because I planned. Sorry folks, I just can’t feel for you with your homes under water and still driving your SUV’s.

  2. Interesing article in today’s Heritage Foundation “The Foundary”
    “What if Families Handled Finances Like the Federal Government Does?

    In 2010, median family income was $51,360. If a typical family followed the federal government’s lead, it would spend $73,319 and put 30 cents of every dollar spent on a credit card. This family would have racked up $325,781 in credit card debt–like a mortgage, only without the house. What credit card company would continue lending money to this family? All those numbers can be hard to visualize, so see for yourself what it looks like in one of our latest charts.”. Read more here..

  3. Don,
    I agree with your thoughts. Being conservative, living within your means and personal responsibility are things all of us should practice. The problem is we cannot force others to live by our rules of the road. It is time for those who have not lived by the Golden Rule to now live by the sword. There are those that have suffered by unforeseen circumstances, they should be helped while those who expect government help for their own errors should now be forced to fall on their own sword. They will be back but this time will not have to fall on anything but their own history. Some lessons are hard learned but not easily forgotten!

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