No good deed goes unpunished.Â Bail someone out of a bad decision or conduct, and the odds are thatÂ you won’t netÂ gratitude and reform but will earn theÂ right to negotiateÂ another bail-out.Â The Comptroller of the CurrencyÂ has some proof of moral hazard inÂ a December 2008 report.Â John C. Dugan, THE Comptroller, offered the following hard data to support the hard truth on bail-outs being ineffective, “After three months (following a modified loan or loan work-out), nearly 36% of the borrowers had re-defaulted by being more than 30 days past due.Â After six months, the rate was nearly 53%, and after eight months, 58%.”Â The data cover 60% of all first-lien mortgagesÂ in the United States, or about $6 trillion in loans.Â The questions Mr. Dugan has are:
1.Â Did they default againÂ because the loan was bad from the outset?Â i.e.,Â the lender made a poor loan that was unfixable?
2.Â Did they default because the work-outÂ did not offer enough relief?
3.Â Did they default because they used the new padding in their budgets for other purchases and/or debt?
The question the Barometer has is, ‘Why these questions?”Â They presume the fault somehow lies with lenders and their origination and work-outs.Â Could it be that these borrowers simply made mistakes born of poor judgment?Â Could it be that these folks are just not ready for the big leagues?Â Those would be the leagues in which you can handle a monthly mortgage payment and that the payment amount allows for some budget cushion.Â The federal government is WORKING to bring monthly mortgages paymentsÂ DOWN toÂ 31% of net income. At 31%, there is still precious little wiggle roomÂ in the family budget.Â And there is no space at all for a lost job.Â You can’t re-work a loan out of too-little or no income.Â Sometimes the only remedy for poor judgment is consequences.Â Unless and until some folks live through the consequences, the refinement of poor judgment intogood judgment never happens.Â Â