President Bush’s recent plan to bail out hundreds of thousands of subprime borrowers facing steep upward adjustments in their mortgage interest rates raised blood-boiling ire across the country.  Many responsible homeowners who exercised fiscal restraint during the recent real estate bubble felt that the government’s plan was an unfair handout to reckless homeowners.  Since the plan was announced, print and television media has aired all kinds of stories about subprime borrowers that tug at the heartstrings, especially around this holiday time.  Now I have to say upfront that any subprime transaction that involved outright fraud should not be tolerated.  But that is not the situation for a lot of these subprime borrowers.  Instead, their problems arise from dumb decisions.

Take the recent article in the Wall Street Journal, “Mortgage-Relief Divides Neighbors,” December 17, 2007.  The article discusses the plight facing a community in California, where numerous houses on a local street are in foreclosure.  The story profiles the Oropezas, a dual-income family with two kids.  After buying a home in 2004, the Oropezas refinanced several times, pushing their mortgage obligation up to over $800,000, even though the initial purchase price was only $550,000.  They used the money to pay off credit card debt and to finance home improvements like a backyard waterfall.  The family tried to sell in 2006 for a price that would pay off their mortgage, but to no avail.  With mortgage payments mounting, the family lived off of credit cards, but eventually stopped paying altogether.  They moved to Texas, abandoning the California home, but not before taking a Caribbean vacation and buying a Lexus and Suburban SUV with no money down.  The article quotes Mrs. Oropeza as saying that “we are sad because people think we are a bunch of flakes who walked away from this house and tried to make money.”  It also notes that Mr. Oropeza called the toll-free number for the government mortgage relief plan and left a message.  What is telling here is that the Oropezas didn’t face a medical emergency, loss of a job or spouse, or even a reset in their mortgage interest rate.  The Oropezas’ situation unfortunately embodies the attitude of entitlement that our consumer-driven culture fuels.  For entrepreneurs, this kind of attitude in the busines world is a death wish, but not as rare as you might think.  I’ve seen business owners who have insisted on handmade teak furniture for their offices and country club memberships, even as the business is bleeding red ink.  One business owner that I knew some years ago readily took money from her 70 year old mother when she ran out of cash to operate her law practice, even while she squandered office funds on a Mercedes and several assistants that did non-office tasks such as taking her clothes to the dry cleaners.   Homeowners like the Oropezas who mismanaged their finances would be lucky to get any financial relief from the government.  In the business world, however, it is truly sink or swim.  So, before you decide to stretch the business line of credit to lease a new car or buy brand-new furniture for the office, remember that the calvary will likely not be coming to rescue you.