Dear Liz: It is appalling that the owner of the investment property discussed in your recent column is considering not taking responsibility for the debt that is owed. We shouldn’t be bailing out the people who chose to buy homes without considering that their income could change — and that property values could go down as well as up. Where is the bailout for the people who chose to make their investment in the stock market, on margin, and now have investments worth a lot less? You can choose to sell the stock at the loss, but you still owe what you borrowed.
Answer: You’re suggesting that everyone should have been able to predict today’s financial, real estate and unemployment situations. If that’s the case, your crystal ball is a lot better than anyone’s.
The first wave of foreclosures primarily affected people who never should have been approved for the mortgages they accepted, if sane lending standards were in place. If they should have known better, so too should their lenders. These days, however, many otherwise prudent people are getting caught in financial crunches because of high unemployment and the extraordinarily long duration of joblessness many face (the median duration of unemployment is currently over 20 weeks). And few of these homeowners are getting “bailed out.” Fewer than half a million homeowners have received permanent loan modifications through the government’s Home Affordable Modification Program.
The investor in question is considering trying to arrange a short sale of a rental property, in which the lender would accept the proceeds from the town home as settlement of the greater amount the investor owed. That’s not a bailout — there’s no government assistance involved. It’s a private contract renegotiation between two parties.
As for buying stocks on margin, remember that the investments in your brokerage account are collateral for any loan you get from a brokerage. If your account plunges in value, brokerages can and will sell equities in your account. “Bailouts” for investors buying on margin typically aren’t needed, because the brokerage usually makes sure it gets paid.