Saturday, November 15, 2008

What Will Happen When We Bail Out Homeowners

Let's say I'm one of the large majority of homeowners who CAN afford to pay their mortgage, but I hear that my neighbor was able to renegotiate his mortgage downward. Might I be tempted to see if I can get mine renegotiated too?

That's the problem with most handouts. Meant for the few who really, through no fault of their own, have a serious problem, there will be many others who will decide to get on the gravy train. 

It worked that way with welfare and other government giveaways (All my unemployed clients are deferring looking for work until their ever more extended unemployment benefits run out) and it's going to work that way with bailouts. 


Anonymous said...

I believe that you're not understanding how little we seem to learn from history, because we just continually repeat it. You said it yourself. "It worked that way with welfare."

Also, human nature needs to be considered. If the average person can get a better deal for themselves or a bigger piece of the pie, they will. Same with a growing government. They're taking more and more power, and they're not about to give any of it back to us.

But it looks like homeowners won't be getting a bailout anytime soon. The taxpayer money that was intended to just help the subprime homeowners is now going to everybody BUT the homeowners. Thank you, Mr. Paulson.

Anonymous said...

I don't know how long you've held your house, but I do know that you were recently grumpy about property tax, so grumpy as to conflate it with Federal tax policy.

If the bank sold you too large a loan when you bought property, and the market has now proven that the bank sold you too large a loan, I don't see a problem with being able to go back and say "You sold me the wrong piece of financial equipment; now sell me the right one, and take this POS back."

In my day job, I recently bought about a very expensive piece of gear. My sales guy had come on-site and inspected our facility. He proceeded to arrange for delivery of equipment that was electronically incompatible with our house power.

We are working together to fix the problem - at the end of the day, I want the equipment, as you probably want your house. I am not prepared to pay the costs of fitting it to our mains - this is something that I relied on the experts to get right up front. They sold me the wrong tool for that, and are now getting me the right tools. The problem is being taken care of at fairly considerable additional cost; I suspect that the profit on the original sale has been halved, since we are not paying the cost.

Folks who were originating huge loans well ought to be being held accountable for that.

Those who signed on the dotted line share in the responsibility, of course. Which is why, under most of the plans I've seen - plans that come from the lenders, with no Federal regulation yet - loan terms are being renegotiated; no one is having an entire loan forgiven, and many of these plans are set up so that if the market inflates again and the house is sold, the bank will be able to recapture that growth.

It makes sense, and indeed in many cases people who signed for ARMs were promised they would be able to renegotiate at better rates once they'd been in the house long enough to "build equity."

Anyone who was told they'd build equity if they were in an interest-only loan was defrauded, and many folks in interest-only loans were not told the truth about what they were doing (or they wouldn't have taken the loans out.)

Your relentless focus on the individuals who took the loans out, rather than the more expert individuals who sold them and the far more expert individuals who were creating bond-grade investments from consumer debt, strikes me as lacking balance.

And because it lacks balance and appears to me to prefer foreclosure over negotiation, it may satisfy some punitive urge you have, but it will actually prove more costly in the long run.

If a bank can renegotiate a loan with the current owner for 80% of the book value and keep getting paid, isn't that better for everyone than the bank foreclosing, selling for 50 cents on the dollar at best, and the former owner moved back into renting?

The only people who come out ahead in a punitive mode are landlords who can buy up foreclosures and rent them back out. At which point, renters are still paying mortgages - they're just paying someone else's mortgage for them, and further concentrating wealth in the hands of those with enough dough to work the system.

Anonymous said...

There are at least a few banks out there that are not buying a ticket for the gravy train:

It's good to know that there are still some people and companies that seem to know what's at stake.

Anonymous said...

I think this is a perfect illustration of what you're trying to say:

Feed one and they all come running.


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