Housing bailout

I see very well that many people need help staying in their homes. And I see the upside for me if someone gets help paying their mortgage, or a lowered principal. But I don't see the obviousness of this help. Diane Reams is especially bad: she seems to lose patience with anyone who suggests that they don't want to see their neighbors bailed out. But here is one scenario for why bailing out one's neighbors might be seen as bad.

When we bought our first house, we looked at our budget and figured out what payment we could afford. Then we went online and used a mortgage calculator to figure out what houses we could afford. Then we went to our realtor and asked her to show us houses in that range. She showed us a few houses that were more, but not many, and she stopped when we asked her to. She sent us to the mortgage broker in her business (I think we eventually went with a special "first time buyer mortgage" from a different bank) and he looked at our income and told us we could afford much bigger payments and could get a bigger house. We said "no thank you." Then he said, if we got one of these "ARMS" we could have a lower monthly payment, and the rate wouldn't be adjusted for 5 years and we would likely move by then anyway, and we said "no thank you." We got our 30 year mortgage with the slightly higher rate for what we could afford and moved into our little house.

Suppose we had neighbors who bought in to the snake oil the broker was trying to sell. They got the bigger house (which we would have liked, but we decided we couldn't afford). They got the lower payments so they could afford the nicer TV, the vacation, going out more, etc., while we had our less risky but less profitable mortgage. And now, they can't make their payments because their ARM went up. I understand that they were probably taken advantage of to some extent, but in the end, they were greedy instead of sensible. They had the upside of taking the risks. Now the government wants to make the lender lower the principal on their house so their payments go back down to something they can afford. What downside (other than sleepless nights) do they face?

Note: some truly horrible things went on in tempting people who truly should not have bought a house to get one, or in manipulating innocent uneducated buyers without giving them full information. Dishonest brokers should face the consequences of their actions (is roasting over a spit done anymore?), and the homeowners who were taken in by them should be let down as easily as possible, either by staying in their house or getting out as painlessly as they can. My problem with the bailout is with people who should have known better, but who decided to take risks in return for money. Even if they didn't understand the full extent of the risk (i.e., they didn't realize they could lose their house, or they didn't believe it would happen to them) they should see some downside from their behavior.

It may be that there is some downside, I just haven't seen it in the description of the programs.

Despite my discomfort with some of the homeowner bailout propositions, I think that the policy of allowing people who are "underwater" on their mortgages to refinance with a lower interest rate is a great one. I think it is true that most people want to keep their house, whether they are underwater temporarily or not. These people are less likely to walk away from a house if they can afford the payments than if they cannot, so it seems to me there is no increased risk. Of all the possible ways to bail out homeowners, this makes most sense to me, which is probably why it is not liked by the pundits out there...

And the bailout/stimulus package should come with mandatory personal finance education classes for every citizen of the US unless you can pass a test showing minimal competence.