It’s basic human psychology that if something is free, we tend to value it much less. Take for example the rash of foreclosures on homes from the show “Extreme Makeover, Home Edition“.
Most of the people who participate in the show receive a brand new, high-end home that is mortgage free.
The problem is, many of the people who should be grateful for the opportunity to get back on their feet and own their home free and clear – instead act as though they’ve won the lottery and immediately take out a home equity loan to get at the cash in the property.
This is a prime example of why “Foreclosure Bailouts” don’t work. When people get “bailed out” they rarely value the help they’ve been given and tend to make the same mistakes over and over. Case in point are the statistics on the re-default rates for loan modifications. In a study by the Office of Thrift Supervision, over 55% of modified loans were back in default after 6 months.
If the government artificially props up housing prices by repricing loans and allowing “cram downs” they will just prolong the problem and we’ll still be dealing with unstable home prices 3 years from now.