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\f0\fs22 \cf0 Podcasts on UNCTV.org are made possible by the financial contributions of
viewers like you, who invite you to join them in supporting UNC-TV.\
\ Kelly McCullen: You read of banks modifying
struggling homeowners\'92 mortgage terms. Government programs offer financial assistance
to keep some borrowers from losing their homes. In policy circles, you\'92ll hear a debate
over whether these well-meaning programs are any \'93good\'94 for our economy. It\'92s
called a \'93moral hazard.\'94 \{16\}\ \
What \'96 Kelly Mc: What is a moral hazard?\ \
Dr. Roy Cordato: Jeff Foxworthy actually has a routine about it. How talks about how whenever
he goes to get a rental car, he buys the full coverage insurance. Everything. Wreck the
car, no matter what it is; you just walk away and get another one. He says, \'93Because
when I do that, I can drive like a wild man, right? Well, that's moral hazard. \{28\} \{TRT:
Kelly Mc: Moral Hazard suggests that borrowers, who signed for unaffordable mortgages, will
act irresponsibly in the future because they were \'93bailed out\'94 by a loan modification.
The North Carolina Justice Center\'92s Rochelle Sparko helps home owners fight foreclosure
and disagrees with that opinion.\ \
Hazard \'96 Kelly Mc: Is it really a moral hazard to help the \'93Little Guy?\'94\
\ Rochelle Sparko: I don't think so. I appreciate
that there are probably two, distinct groups of people here. But, what we have been seeing
over the last couple of years \'96 as we try to figure out how to mitigate the crisis \'96
is that there's no good policy decision that anybody's been able to put forward that helps
us to distinguish between the two groups. \{20\} \{TRT: 1:25\}\
\ Kelly Mc: Dr. William Hall is a economics
professor at the University of North Carolina at Wilmington. \{5\}\
\ William Hall \'96 Recession \'96 I think the
data reflect, or support, the existence of moral hazard. We begin with a proposition
or an hypothesis that if you reduce the penalty for engaging in a particular act, you take
away some of the risk that the individual who engages in that act might bear, that you've
reduced the cost of engaging in that act. And if you reduce the cost of engaging in
that act, it's likely that that act will continue \'96 that act will take place. In fact, it
may take place with stronger force. \{21\} \{TRT: 1:51\}\
\ Rochelle Sparko \'96 Say \'96 I have a very
hard time saying, \'93Let's just take a position of not helping anybody\'94 because some people
knew what they were doing. There were so many people who didn't and a lot of those people
were lower-income borrowers who stand to lose everything if they lose their homes. They
placed their life savings into these homes and without their homes, without the assistance
that some of these programs provide, very bad things happen. \{27\}\
\ Kelly Mc: The John Locke Foundation\'92s Dr.
Roy Cordato draws a distinction in classifying an anti-foreclosure effort as fueling the
\'93moral hazard.\'94\ \
Dr. Roy Cordato \'96 Bailout - If it's the government saying we're going to do that with
taxpayer-backed money, that's one thing. And I would argue that that shouldn't be done,
that that is truly a subsidy. If a bank does it because it says, \'93Look, it looks at
it, maybe repair the house, whatever. If the bank looks at it and says it makes more sense
for us to modify that loan, re-structure it and keep them there, than it does to foreclose
on them, then I would argue it's a decision that makes sense.\
\ Kelly Mc: A private decision between private
entities.\ \
Dr. Roy Cordato: Exactly.\ \
Kelly Mc: But, Neighbor \'93B\'94 has cut off the cable, sold the new car and got an
old clunker, they're scraping by to make that house payment.\
\ Dr. Roy Cordato: Right.\
\ Kelly Mc: And, they don't want the mortgage
modification. What do you say to them if that happens next door?\
\ Dr. Roy Cordato: I'd say to them, \'93Look,
this a private contractual relationship between your neighbor and their bank.\'94 If you're
bank isn't willing to make that same arrangement, well, you know, maybe you negotiated with
the wrong bank. I don't know what their particular situation is. But, how much worse would it
be if you said to that person, \'93I'm going to tax you. You are responsible. You are making
your payments. You're doing what you have to do and I am going to tax you and take that
money and bail out your neighbor with, essentially your money. THAT is the true injustice. \{1:40\}
\{TRT: 4:07\}\ \
Kelly Mc: Supporters of mortgage assistance programs say it\'92s impossible to separate
purposely-negligent borrowers from borrowers affected by unforeseen circumstances like
a job layoff.\ \
Chris Kukla \'96 Say - I think most of the people who are getting a loan modification,
they\'92ve done everything they need to do. I mean, most of these folks, they\'92re not
hanging on to a lot of assets. They have run themselves down to where they have no choice
left. So, I think in a majority of the people we\'92ve talked to who are seeking modifications,
it\'92s not so they can shield other assets, because this is as far as they can get. \{34\}
\{TRT: 4:51\}\ \
Think \'96 Kelly Mc: Do you think people who face adverse situations, like the topic we're
speaking \'96 they DON'T learn their lesson or they DO learn their lesson?\
\ Dr. Roy Cordato: I think they do. I think
people learn. Look, if they didn't, then I'd argue that markets don't work because markets
are all about trial and error. People make mistakes in markets. Businesses make mistakes.
They make investments that go \'93south.\'94 If they don't get bailed out, they take the
losses, learn their lessons and change their investment strategies. I think people learn
but they DON'T learn if you don't give them an incentive to learn. In other words, what
encourages the learning process is bearing the cost. \{45\} \{TRT: 5:36\}\
\ Learned \'96 Kelly Mc: Are you seeing people
who say, \'93Okay, I won't make this mistake again\'94 or do you see people who say, \'93Ha
Ha! I got away with it. I got to stay in my house.\'94\
\ Rochelle Sparko: Nobody I've worked with has
said, \'93Ha Ha, I've gotten away with it.\'94 Nobody's getting a free house. Nobody is getting
away with more than they should, I think. There is no principal reduction that is happening.
We wish that it were. \{26\} \{TRT: 6:02\}\ \
Stupid \'96 Kelly Mc: There are consumer advocates, out there, who say borrowers didn't know what
they were getting into. They just wanted a home. They acted in good faith and they were
taken advantage of. You buy it?\ \
Dr. Roy Cordato: It's possible to some degree that that's true. On the other hand, it's
rather paternalistic if you ask me. It says, \'93Well, these people are stupid. The banks
are smart and people just went out and got loans that they couldn't afford.\'94 \{32\}
\{TRT: 6:34\}\ \
Rochelle Sparko \'96 Modify \'96 What we're just seeing is usually moderate reduction
in the interest rate and you could complain and maybe feel angry that your neighborhood
got an interest rate reduction but all that's doing is reducing the amount of money the
bank is making on the property. It's not reducing the amount of money that the people borrowed
or the amount they're paying back from a principal perspective. What we're also seeing a lot
of time is the reamortization of the loan; they're recalculating for how many years the
borrower will be making payments. So, it just means they're not going to own their home
in thirty years. They're going to own it in forty. \{37\} \{TRT: 7:11\}\
\ Kelly Mc: If there is a \'93moral hazard\'94
to helping home owners who face foreclosure, consumer advocates, say there are equal hazards
for neighbors whose properties can lose value if an empty home goes to foreclosure auction.
\{16\}\ \
Chris Kukla - Average - The average North Carolinian who lives 1/4 mile from a foreclosed
house has seen their house depreciate by up to $2,500. If you\'92re living around a lot
of foreclosures, you\'92re taking a beating even though you did everything right. So,
we need to be as aggressive as possible. \{13\} \{TRT: 7:40\}\
\ Think - Kelly Mc: What you're seeing is, by
helping an individual, you're seeing an entire community, an entire neighborhood being preserved,
at least from a property value standpoint.\ \
Rochelle Sparko: From a property value standpoint, from a safety standpoint, you know \'96 having
a vacant property next door is, it's a danger. It's a danger to the community. \{18\}\
\ Dr. Roy Cordato \'96 Someone \'96 Someone
may very well be happy about the fact that their neighbor got that bailout but it doesn't
change the argument that when you do that, it also increases the possibility and the
probability that other people going into markets to borrow money, because they think, \'93Well,
you know, okay so if I can't pay the payments, I'll get bailed out, too. Okay, I will take
more risk than I would otherwise take. \{35\} \{TRT: 8:33\}\
\ Kelly Mc: North Carolina qualified, in March
2010, for a share of $600-million federal dollars. The funding will cover zero-interest
loans that will cover mortgage payments for borrowers seeking work, job training or face
other qualifying, and temporary, hardships. Over 400 borrowers could see the principal
on their mortgages reduced or interest rates lowered. The discussion on whether bailouts
or empty houses are the greater economic risk will continue.\
}