San Francisco Chronicle columnist Kathleen Pender titled her latest personal finance column: “Are you an idiot to keep paying your mortgage?” The premise was simple: With the government doing so much to help out the soon-to-be-foreclosed, does it make economic sense to be a good, responsible mortgage payer. In many cases, the answer is now, as the government has made struggling a lot more lucrative.
Cue outraged bloggers: Conservative media site NewsBusters.org called it a “You’ve Got to be Kidding Me” moment, and predictably slammed the Chronicle for running a column encouraging irresponsibility. Others, joined the parade, trashing the column.
The people who are freaking out are seriously missing the point on this one. The purpose of Pender’s column wasn’t to incite people not to pay their mortgages. It was to show the stupidity of recovery schemes that create incentives not to be responsible. The title was provocative, but it’s basically a warning about the distinct possibility of moral hazard with housing baillouts.
She actually quotes Peter Schiff to explain the mechanics of how things could play out:
Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.
“This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.”
The government is offering loan servicers $800 for every homeowner they get into the plan.
Schiff predicts that loan agents “will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan.“
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