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Tilting at Windmills

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December 7, 2007
By: Kevin Drum

HOUSING UPDATE....So who's the most disgruntled by George Bush's new plan to address the subprime mortgage fiasco? Borrowers and consumer advocates, who say the plan is too stingy and shuts out low-income victims? Or careful consumers, who are pissed off that while they scrimped and saved, the folks who used their homes as ATM machines are going to get bailed out? Oddly enough, it's beginning to look like this plan has the potential to create an enormous amount of ill-will among almost everyone.

In other housing news, the rate of foreclosures hit another record last quarter, and Toll Brothers took a $200 million writedown on the value of its land and announced that new home sales declined 34%. Ugh.

Kevin Drum 1:48 AM Permalink | Trackbacks | Comments (95)

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I'd just like to know how I can find the bond that was sold from loaning me money for *my* mortgage, so I can buy it back for pennies on the dollar. Everybody wins!

Posted by: anonymous on December 7, 2007 at 2:13 AM | PERMALINK

The government should do what it can do cushion the coming fall, but this idea of a bailout (which the announced plan isn't) is deeply unpopular in some segments. Check out the excellent LA Times housing blog L.A. Land for a taste of the local reaction.

Posted by: Ryan on December 7, 2007 at 2:16 AM | PERMALINK

Toll Brothers took a $200 million writedown on the value of its land and announced that new home sales declined 34%. Ugh.

Sounds bad, but upon this announcement Toll's stock went up 13% in a single day (Thursday). Evidently its quarterly loss was not as bad as the market expected.

Posted by: JS on December 7, 2007 at 2:21 AM | PERMALINK

It's not that bad. It basically divides (a subset of) borrowers into three groups: those who are going to default no matter what, those who won't default, and those who might after resetting. Only that last group gets help, and all they get is no reset (not trivial, but also not exactly showering them with cash). So investors get more money than they otherwise would (enough fewer defaults to make up for the reduced interest) and homeowners (including defaulters) come out ahead because fewer defaults means less supply and a less severe decline in home prices (although they'll still probably drop considerably anyway). And so far, taxpayers in general are off the hook.

There's a colorable argument that doing anything to keep these people in their homes is too much - they'd be much better off just walking away and not staying in debt on a declining asset. I don't know that it's a totally convincing argument, but it's at least rational.

Posted by: Dave on December 7, 2007 at 2:39 AM | PERMALINK

I don't understand the resentment addressed in the Post article. My wife and I purchased a home about 18 months ago. We didn't put alot down, but were still able to get a reasonable fixed rate mortgage. I've done some work to it. This summer my wife took a job out of state, and once I finish with grad school in another 18 months, I hope to join her, (we'll have owned the house over three years by then). We never dreamed of flipping it for 100% profit like you used to read about, but we wanted to make our money back and anything on top of that was gravy. 18 months is a long ways away, but I'm still worried that all of the foreclosures nation-wide are going to make it difficult to sell at all, much less for any type of profit. That being said, I'm curious if the people that are so upset about the "bail-out" are really that ignorant of what massive foreclosures would do to their home's values, or just mean-spirited.

Posted by: brooks on December 7, 2007 at 2:42 AM | PERMALINK

I'm just recalling confident statements by various cognoscenti about a year ago, saying that real estate was a bit overvalued, but the worst that could happen was that a few overheated markets might decline by 10 to 20%.

Posted by: jimBOB on December 7, 2007 at 3:09 AM | PERMALINK

I'm pissed, because, living in Europe, but being paid in dollars, I am literally paying for this bullshit out of my paycheck. The sub-prime mess has caused a 10-cent decline in the value of the dollar in the past two months, jacking up my rent and cost-of-living.

So, yeah, I am pissed about the bailouts, both of corporations (through the declining interest rate) and the consumers. Frankly, we should jack the interest rate up to 8%, and let the chips fall. A lot of people might not like that, but damn, it sure would fix a lot of things which are wrong with the economy

Posted by: Castor Troy on December 7, 2007 at 3:17 AM | PERMALINK

Mission accomplished! By the time this really explodes (much like Iraq and the generations of terrorists our botched occupation is creating), Bush and his wealthy cronies will be long gone. They'll also have the last laugh because these Bush created/facilitated disasters will almost certainly occur during a Democratic president's term upon whom they will waste no time, energy, or expense to pin the blame.

This is all out of the Republican playbook (not all steps need to be fulfilled):

STEP ONE: create and/or hype a problem (usually one that is caused by your campaign contributors enriching themselves at the expense of the public);
STEP TWO: blame the problem on Democrats or fear monger;
STEP THREE: use this to get elected
STEP FOUR: offer solutions that either consolidate power, lower taxes, or privatization/outsourcing so you can dole out contracts to campaign contributors to enrich themselves yet again at the public's expense.

Example 1: massive deficits/debt.
Cause the problem by cutting taxes and spending more. Blame Democrats as "tax and spend", get elected. Use deficits as an excuse to cut social programs that normally benefit Democrats. Borrow money from the Social Security surplus trust fund to create a new problem (started under Bush Sr).

Example 2: Social Security solvency.
Fear monger (it's not nearly the looming disaster they would have you believe). Use as excuse to try to privatize Social Security so Wall Street campaign contributors can take a cut of trillions of dollars worth of retirement transactions (gee, that wouldn't cut into our returns would it!?)

Example 3: illegal immigration.
STEP ONE: the Bush administration stopped enforcing laws against corporations (enforcement incidents went from thousands a year to literally just a few handful a year). Corporations start hiring more illegal aliens (meat packing plants, maids at hotels, etc.). The number of illegal immigrants in middle America spiked noticeably under Bush; STEP TWO: fear monger (white America will soon be a minority, Americans are losing their jobs, the borders are insecure); STEP THREE: use it as a political issue (mixed results); STEP FOUR: pending. Potential for giant construction contracts on border, KBR has built detention centers and Blackwater is building a large training ground along the border.

Iraq... fear monger, attack Democrats for being anti-American, weak on defense, etc., get re-elected. Turn Iraq into a subcontractor's paradise - even half of the "troops" in Iraq are actually mercenaries hired for 6 figures.

Enron... Gov. Pete Wilson failed to build sufficient (any) power plants to keep up with California's growing energy needs. Despite Gray Davis accelerating the construction of new plants, deregulation was offered as partial solution. Enron and other companies, shielded by a Bush administration FERC that refused to enforce it's primary charter obligation of providing fair and stable energy prices, allow California to be defrauded out of tens of billions of dollars. They then blamed the energy crisis they manufactured on Gray Davis (Schwarzenegger even met with Ken Lay in Beverly hills while we were experiencing rolling blackouts) to strategize on how to leverage the crisis to get Arnold into office (and wouldn't you know it, Arnold "settled" many of the legal cases against these energy corporations for pennies on the dollar... how fortunate for them!).

You can do this with oil, public schools, sex education, and so on. You get the idea.

Rarely are the people who create these problems ever held accountable for the harm they have caused. In fact sometimes the government will even step in to bail out the mega-corps (it's 'evil wellfare' if the government helps out Joe Sixpack when he loses his job and leave him to sink or swim in the the free market... but when Megacorps who contribute to political campaigns cause the very problems that later bite them in the ass, the government will sometimes come and bail them out rather than let the free market work.

To Republicans, the term "free market" is really just a euphemism for "f- the poor".

Posted by: Augustus on December 7, 2007 at 3:20 AM | PERMALINK

Apologies - that was a bit more 'ranty' than usual. Funny how long something can get when you get distracted and return to it later.

Posted by: Augustus on December 7, 2007 at 3:22 AM | PERMALINK

Yes, let's give a big writedown to Toll Brothers, foul builders of foul McMansions, pavers and rapists of the countryside.

You see, when you give huge writedowns or tax write-offs to rich businessmen, that just good bidness. When you give poor people a minimum wage, let alone monetary or social assistance, that's devilish socialism.

Posted by: Anon on December 7, 2007 at 3:42 AM | PERMALINK

No problem, Augustus. It needs to be said. Often.

Apologies. I meant to post following in this thread, not the prior.

Whether deliberately or otherwise, we have a suppression of financial market memory. Certainly not all those in position of influence and control, whether at the Fed, Treasury Department, or at finacial institutions, etc., are so young to have forgotten the Junk Bond and Savings & Loans debacles, let alone the dot-com bubble. Now this predictable event.

What they all have in common is ideology in pursuit of the chimera of the free and self-regulating, self-correcting market. Never happened, never will. Whether you idealogues want to believe it or not, capitalism as so far practised has never worked that way; left to itself it booms and busts, which the concensus has come to agree is no way to manage an economy.

All these events followed on loosening of regulation, oversight and control, a failure to apply judgement and prudence, both of which used to be valued in the financial sector. You know, risk managemnent and all that?

And why? Greed. The pursuit of personal, not shareholder or communal wealth.

If you don't know who Michael Milliken was, or about all the 80s Reagan banking de-regulation there's part of the problem.

This latest one, the Federal Reserve was definintely asleep at the switch. The greed shown the last few years throws Milliken's $2-300 million (or whatever it was) into the shadows.

Millikin went to prison.

The problem here is that those who made obscene profits or income walk away after, basically, conning investors while regulators slept or turned a blind eye.

That's where the injustice lies. And that's what is galling. It's the same with these CEOs who don't just underperform but actually destroy shareholder capital yet walk away with, even, hundreds of millions of dollars.

What is not obscene with this picture?

Crude and inept as the "relief" the idiot son has signed on to, where prudence is not rewarded, and (probably) a slim few will fall in the qualification area of help (the reverse of the drug bill doughnut hole), it certainly hasn't extended to punishing those who created the problem.

And the Federal Reserve needs a good shaking.

Posted by: notthere on December 7, 2007 at 3:57 AM | PERMALINK

That being said, I'm curious if the people that are so upset about the "bail-out" are really that ignorant of what massive foreclosures would do to their home's values, or just mean-spirited.

The price of housing needs to come down. It's not that I'm mean spirited. It's more that I care a lot about the people who need to buy houses in the future, and need to be able to do so at reasonable multiples of their income. House prices got way out of control.

It is too bad that it leaves you in the possibility of taking a loss. However, peak prices were unsustainable, and it would have been disastrous if they hadn't adjusted somehow.

Posted by: J. Michael Neal on December 7, 2007 at 5:23 AM | PERMALINK

Remember George W. Bush, a few years back, crowing about "the highest rate of home ownership in history"?

Now you know why.

Posted by: The Conservative Deflator on December 7, 2007 at 6:30 AM | PERMALINK

"we wanted to make our money back and anything on top of that was gravy."

Um, Brook, so you are smart enough for Graduate school, smart enough (I'm guessing) to understand using student loans to build your own equity instead of paying a landlord--but weren't smart enough to know that you were buying an asset that had been inflating for years? By the way, I'm curious what profession you are training for and how much that helped get your mortgage.

I have an idea for someone in your position who might be painfully upside down soon--maybe you can find a renter to exploit to pay that inflated mortgage off for you while you move to another city. Not letting prices collapse to what the market will bear will certainly reduce your exposure. I'm sure that idea never occurred to you though, right?

By no means should you personally be left holding the bag on a Ponzi scheme you personally decided to buy into and hoped to profit from personally if your timing was right. And why should you be the one to mail the keys to the bank so they can eat their bad debt? Can't we just keep the party going?

And by no means should prices collapse enough, say by 50%, so that they start reflecting actual American incomes again. Heck, maybe if they did that, more renters could actually own property they could afford with their actual non-inflating incomes.

Really, you just don't understand the resentment? Renters and those responsibly saving for a down payment have been suffering inflating rents for years as a result of this easy credit environment you chose to buy into.

BTW--you're a student. Unless you have income, or extremely likely income, the bank took a very real risk on you--and you took a risk called home ownership before getting financially established. That's your business, profit or loss, and nobody else's responsibility or problem.

Good luck on a personal level, but in no way should there be a bailout of any kind.

Posted by: Pseudonymicon on December 7, 2007 at 6:52 AM | PERMALINK

You forgot about all the rabid free marketers who say "how dare he"

Posted by: vrk on December 7, 2007 at 6:54 AM | PERMALINK

I'd just like to know how I can find the bond that was sold from loaning me money for *my* mortgage, so I can buy it back for pennies on the dollar. Everybody wins!

I did this once where there was a title problem that could only be fixed by having a client, in effect, foreclose on himself. The foreclosure was iffy, though, and subject to attack. In some states a self-foreclosure to wipe out your second mortgage is flat illegal, so don't try this at home.

Banks are skeptical when you call them up offering to buy a specific note - they hate to get ripped off, they don't care for the competition.

Posted by: Xenos on December 7, 2007 at 7:24 AM | PERMALINK

You know.... I think I'm going to throw forty years of education, reading, study, and experience right out my (rented) window today! I'm going to go in debt up to my eyeballs - the more the better!! And then I'm going to find the dumbest, stupidest, most ignorant lender I can possibly find - and I'm going to take out a teaser ARM!!! And if I fail? I am going to be first in line to get MY idiot brain "saved" too!!! I can't lose!!! It's BRILLIANT@!!!!!

Posted by: ARM=stupid on December 7, 2007 at 7:30 AM | PERMALINK

Since brokers sold these tricky loans to borrowers and then again to the investors, making lots of money off both, shouldn't somebody with deep pockets and lots of losses (ie. the banks) go after them? How fraudulent does it have to be before they have a case? Isn't that the way the system works when it's not regulated by a government agency, ie. people go to court for justice? Maybe it's too hard on a case-by-case basis so let Paulson devise a "bail-out" that "simulates" a million lawsuits and gets the damages from the ones that caused it.

Posted by: dennisS on December 7, 2007 at 7:52 AM | PERMALINK

We'd have a 'free market' in the housing industry if there were no zoning laws or building codes. "Buy land, build what you want, how you want." I doubt if I'd like to live in such a country by choice, but housing prices would certainly be affordable.

gold was $35/ounce in 1970 and today is about $800. 23 times

land around here was $200/acre 1970 and now is $20,000 100 times
Same ounce of gold, same acre of land.
There's your problem. Inflated land values. Deflated money.

Posted by: slanted tom on December 7, 2007 at 8:01 AM | PERMALINK

One aspect of the bailout seems very hazy. I've listened to several seemingly impartial, apolitical commentors (NPR, C-SPAN, etc) describe the plan as helping "upwards of tens of thousands" of borrowers. That's a small percentage of the projected two+ million foreclosures reported. MSNBC and other MSM outlets speak of "hundreds of thousands" being bailed out or helped with their problems. Which is it? This is a very large variance in numbers. It sure helps the administration to have the more prominent media reporting the larger figures while experts tout the much smaller numbers amongst themselves and within the industry and government.

Posted by: steve duncan on December 7, 2007 at 8:38 AM | PERMALINK

In 2002, my husband and I wanted to buy a little house in the country, with an eye toward eventually living there. We were renting in the city at that time. We shopped around at a number of banks, applying for a $150,000 mortgage, and literally every bank said, "With your income, you could get a MUCH higher mortgage than this!" Several of them, unbidden, faxed us approval letters for up to $500,000. We resisted -- and ultimately took a fixed-rate mortgage for $132,000. I work in the financial industry, which was already volatile back then, and we wanted a mortgage we could still afford if one or even both of us lost our jobs.

We have since moved out of the city and we live in our upstate home fulltime. Now, it turns out we could have bought a house three times as big, with a subprime loan and an ARM, and gotten bailed out, since we meet all the criteria. Since we're both employed, make our payments on time, etc., we would be considered the "responsible" irresponsible borrowers.

I have NO sympathy for anyone who lent or borrowed irrationally And yes, I resent bailing either side out.

I frankly don't understand anyone who rails against the fiscal irresponsibility of the Bush administration and its corporate cronies and still wants to let borrowers off the hook. The last time I checked, both pushers and users were considered culpable for their actions.


Posted by: sullijan on December 7, 2007 at 8:44 AM | PERMALINK

Count me in the pissed-off careful consumers column. Why the hell did I take a higher interest fixed-rate mortgage when there were plenty of lower-rate ARMs to be had?!? If consumers can't pay the higher rate after adjustments, they shouldn't own that home - it's not sustainable in the long term anyways. Are they going to fix the rates permanently?

The solution to the problem is to crack down on corporations who sell mortgages that can't realistically be paid back, and to preach a little fiscal responsibility to consumers. Unfortunately, Republicans will block the first idea and Democrats will block the second. :P

Posted by: Shag on December 7, 2007 at 8:55 AM | PERMALINK

Let me give you a little peek at life on this side of the tracks. I have an adjustable mortgage. It was the one I could get at the time. I used the money to get my business off the ground and to get my firstborn started in college. I am not behind in my payment, I'm just late. The note is due on the first, I pay it on the 30th and I pay all associated late charges. This loan was never one of those ultra-low rate ones, my lowest rate was 6% in the begining. This has already adjusted twice. My current rate is 12.65% Would it really mean the downfall of the republic if it didn't adjust up again after the first of the year? Cuz that's what the bailout plan would give me. As long as they don't find some reason to disqualify me. Let me say again, I'm making my payments, I'm not in default. If the rate goes any higher that may not be the case. Now maybe I should have held out for a better deal, but that was then and this is now. I live in Michigan. We have $5 between us here and we're just trading it back and forth. My business is down because no one has any money to spend. I can't sell this house because no one is buying. There are six houses on my street for sale/lease right now. My street is two blocks long. I live in a good neighborhood. I don't owe more than the house is worth.
So I'm asking you again, would it really kill you to let me stay at 12.65% until I get to a better place? How much more do you need to punish me?

Posted by: mrstrailerco on December 7, 2007 at 8:57 AM | PERMALINK

You're buying the most expensive item you'll likely purchase in your entire life. You're given notice to show up on a specific day to sign all kinds of documents you have exactly zero expertise in. Common sense tells you it's completely within your rights to review them before affixing your signature. Why isn't an attorney in the field of real estate and contract law with you at the closing? With closing fees, doc fees, maybe a down payment, escrow, taxes and a multitude of other charges tossing in a few hundred or a grand for an hour or two of an attorney's advice seems the proper thing to do. Why didn't you? Why do you now want help for entering into a contract YOU KNEW was not in a field of law you had any professional level of competency or training? Would you handle your own divorce? Would you presume to be the executor of a complicated estate? No? Then why in the hell are you signing real estate contracts without an attorney present? Or at a minimum taking copies of everything to an attorney for review? Hmmm??

Posted by: steve duncan on December 7, 2007 at 9:13 AM | PERMALINK

"How much more do you need to punish me?"

Nobody has a need to punish you or anyone else. I feel for you and am sure you are losing sleep after trying to do your damn best in an Enron economy you have no control over. I'm sorry you're suffering--and suggest you be aggressive in renegotiating payment term with your lendor, regardless of legislation. They need you as much as you need them.

That said, we a need to see this correction happen without manipulation--and for sanity to return to markets so that PRICES start reflecting reasonable multiples of actual non-speculative earned INCOME.

My radical solution: tax the hell out of Americans and Corporations who own more than one dwellings. That would kill this Ponzi-scheme mentality permanently.


Posted by: Pseudonymicon on December 7, 2007 at 9:18 AM | PERMALINK

Americans, more than any other race on Earth (yes, "Americans" are a race separate from others) believe strongly that personal interest is paramount, and collective interest is non-existant.

Witness many of the comments here about "letting the chips fall where they may".

And what then, I ask? Will the solution to a growing homeless problem be debtor's prisons?

More than one in twenty mortgage payers (5.59%) are late with their payments (see mrstrailerco's comments above). Even in good times the rate is near 4.8%. And one in five subprime mortgage loans had late payments this last quarter, according to the Mortgage Bankers Association.

In other words, this is a nationwide problem. You can put your head in the sand and say "it's their own fault", but when you get laid off because the economy has tanked will you still feel that way?

I doubt that this mess will cause a depression, but American views mirror those just before the Great Depression. "The business of America is business" -- and all that crap. We'll see how many continue to feel that way when "the chips fall where they may".

Posted by: Dicksknee on December 7, 2007 at 9:21 AM | PERMALINK

mrstrailerco: What part of "adjustable" did you not understand? If your initial rate was 6%, you clearly bought when interest rates were near historic lows. What direction did you expect them to go from there?

Please get off the cross. No one is "punishing" you. You rolled a lot of dice at once -- new business, new mortgage, at a time when you were already paying for a child's college -- and it didn't turn out the way you crossed your fingers that it would.

And if you couldn't even qualify for a fixed rate in the first place, didn't that tell you something? Did you absolutely have to buy a house and start a business at the same time while already paying for college, which is a big chunk of cash right there? Right off the bat, that strategy seems a bit dicey. So excuse those of us who were more responsible for being a little cranky about having to bail you out.

And if all this sounds like you're being judged, you are. That's the least you can expect when you ask for a bailout.

Posted by: sullijan on December 7, 2007 at 9:23 AM | PERMALINK

mrstrailerco --

what you describe, and what the reported Bush plan is offering, is not a bailout but a workout: temporarily changing the terms of the loan to keep lender and debtor OK. In the old days, where people got loans from local banks that understood and kept on top of local conditions, this could be done. Now that all the debt has been lumped together, split apart, collatoralized and hypothecated in dozens of ways, there is no-one to negotiate a workout with.

The the Bush plan established a standard industry practice workout, that is a good thing. It won't solve the crisis, but will help a lot of borrowers and lenders in the short and medium run.

There is moral hazard on both sides here, and since the lenders are themselves fiduciaries, as a matter of policy we should be punishing them first.

Posted by: Xenos on December 7, 2007 at 9:27 AM | PERMALINK

Sullijan, I'm not asking for a bailout. I'm asking for a fair deal. How is paying 12.65% unfair to you? I MAKE my payments. And it wasn't me trying to buy a house and start a business. I owned the house and the business already. I borrowed against the house to keep the business afloat after a partner bailed.
But on the other hand, I should have just packed up the kids and moved into the Salvation Army - right?

Posted by: mrstrailerco on December 7, 2007 at 9:29 AM | PERMALINK

The solution the business community is avoiding is allowing the mortgages to be written down by bankruptcy courts. Keeping monthly payments down will help stressed owners in one way, but it will not get them out from under water on their mortgages. These people could pay on time for the next 7-8 years and still owe more on the mortgage than the home is worth. The mortgages need to get rewritten to reflect the current market. The rest is all a weak patch.

Posted by: steve on December 7, 2007 at 9:32 AM | PERMALINK

mrstrailerco: You're asking for a bailout. If you felt your initial mortgage -- you know, the one you SIGNED and COMMITTED TO -- was not a "fair deal," you shouldn't have taken it. An adjustable rate is just what it says it is. You signed onto it, so you have no business claiming now that it's unfair and that your fellow taxpayers -- who are also stuck in a bad economy, with kids and bills and businesses and shaky jobs or no jobs at all -- should have to pick up the slack.

Plenty of people who can no longer afford their houses do something really radical -- they sell them. They move into smaller houses. They rent. They don't "move to the Salvation Army." And unless you refinanced your house only recently, which doesn't sound like the case, since you've already had two readjustments -- the housing market you would have been selling into was pretty decent.

Or you could have let the business close and gotten a job, rather than borrowing with an adjustable rate against your only large asset and your family's shelter, which, frankly, is a really dumb and risky thing to do.

Look at the phrases you use. "Punished." "Move to the Salvation Army." "Wouldn't be the downfall of the republic." Jeez, if self-dramatization were a convertible currency, you'd have your mortgage paid off by now. You are not the victim here -- or if you are, it's of your own failure to carefully read your mortgage, assess the risks, and act responsibly.

You are already getting a bailout -- asking for sympathy on top of that is pushing it, especially when you clearly have enough self-pity without anyone adding more.

Posted by: sullijan on December 7, 2007 at 9:50 AM | PERMALINK

I represent real consumers in consumer bankruptcies. I have actually seen what can happen when a sub-prime loan resets--a family loses its house and children have to move during the middle of a school year. I have seen it over and over again. On behalf of the working people everywhere who were steered by mortgage brokers into the subprime market to all of you who don't want to understand the real pain caused by mortgage resets in the current world of stagnant wages go Cheney yourselves.

Posted by: corpus juris on December 7, 2007 at 9:54 AM | PERMALINK

Sullijan-

I can see opposing the bush deal because it will distort the market and indirectly penalize savers and those who could not buy because they chose to avoid the unreasonable risk of a falling real estate market, but how is the Bush plan a bailout? There are no public funds going in, and usually these workouts benefit the banks at least as much as the borrower.

Posted by: Xenos on December 7, 2007 at 9:54 AM | PERMALINK

Did you read the part about all the houses on the market already in MI? I can't sell it, and neither can my neighbors. My only option is walking away. I'll not bore you anymore with my self-dramatization.

Posted by: mrstrailerco on December 7, 2007 at 9:56 AM | PERMALINK

Hear, hear, CJ: you don't hear the free marketeers whining that the banks don't get penalized for their folly much. The banks took a gamble, and they lost. The consumers, however, do not have an obligation to their corporate stockholders and to the public at large as a condition of being given a corporate charter.

Posted by: Xenos on December 7, 2007 at 9:58 AM | PERMALINK

There are no public funds going in, and usually these workouts benefit the banks at least as much as the borrower.

Posted by: Xenos on December 7, 2007 at 9:54 AM |
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
It'll be interesting to see if court costs and sundry other public expenses get tallied. We'll have lawsuits filed by various investors, bond holders, banks and other financial/lending/investor entities once they see themselves getting screwed in the process of writing down or writing off debt and assets (to a greater degree than they already are) under pressure from the administration.

Posted by: steve duncan on December 7, 2007 at 10:05 AM | PERMALINK

Since clearly many here still don't care about those effected by this crisis, let's look at it another way:

Your neighbor smokes. He likes a cigarette just before bed. He knows about both the dangers of smoking and that one shouldn't fall asleep in bed smoking -- but he does it anyway.

Of course, one night he falls asleep and his cigarette lights up his bedsheets. Soon his whole house is on fire. He calls the fire department and they rush to the scene.

But outside his house his neighbors gather and prevent the firemen from dousing the house. "He deserves it", they say. "He knew better", some cry.

Soon his house is consumed by flame. But the fire soon spreads to the roofs of the neighbor's houses. Eventually the whole neighborhood is destroyed.

Get it, yet?

Posted by: Dicksknee on December 7, 2007 at 10:08 AM | PERMALINK

mrstrailerco: Did you read the part where I said the market was better when you took out your loan?

Xenos: I'm assuming the banks will find a way to write off any assumed losses they sustain by freezing rates, and those losses will result in lower tax revenues. Even if the plan does, in fact, benefit some or all of the banks, from the way some of them are already squealing about it, I assume their accountants will find a way to claim that freezing rates results in loss of income.

Don't get me wrong -- I have no sympathy for the banks in this situation. It's just that some people seem to view it as an either/or -- either the banks were wrong or the lenders were. I think there's plenty of blame to go around. Too many people were unwilling to make hard financial decisions, in the face of easy money (or at least money that looked easy at the time). And too many people who frankly should never have been buying houses in the first place somehow felt entitled to do so.

Ninety-nine percent of the time, I find myself agreeing with consumer advocates. But when they say the bailout should go further, and cover even more irresponsible borrowers, I think they jeopardize some of their credibility, and risk alienating a lot of people who struggled to do the right thing, even when faced with the same crappy Bush economy and access to easy money as everybody else.

Posted by: sullijan on December 7, 2007 at 10:11 AM | PERMALINK

I represent real consumers in consumer bankruptcies.
Posted by: corpus juris on December 7, 2007 at 9:54 AM
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Since their plight so pains you can we assume you'll shift your legal practice to document review and recommendations BEFORE mortgage notes and other financial instruments are signed? Why bother collecting fees in cleaning up the mess when you could be proactive and help prevent it? Not as lucrative?

Posted by: steve duncan on December 7, 2007 at 10:12 AM | PERMALINK

The real problem is the predatory lenders.

Posted by: Rani of Kuch Nahi on December 7, 2007 at 10:18 AM | PERMALINK

But hey! The government says inflation is under control! Wages are soaring! Jobs are plentiful! And chocolate rations have doubled!

Posted by: Speed on December 7, 2007 at 10:31 AM | PERMALINK

On the local news last night a young family with an ARM mortgage explained that their payment has gone from $1200 to $1800 a month, and that when their ARM tops out at 14% their monthly payment will approach $3000. The value of their home has also fallen 10%, so they are unable to sell it. Almost all of their monthly payments pays interest, not principal. I bet they could rent a similar house for $1000 a month. I would advise them to default and rent a house, saving the balance.

I said this was a young family, and one thing I heard a critic of the president's plan say on NPR yesterday is that it was the retail real estate/mortgage industry that set people like this up for failure. ARM mortgage buyers received terrible advice from realtors and mortgage brokers. What is so disheartening about it is that realtors and mortgage lenders are considered to be well regulated. The licensing of professionals and funding for oversight failed that young family and the markets. W. Bush's plan will fail them, too.

Posted by: Brojo on December 7, 2007 at 10:54 AM | PERMALINK

In principal, without calling this a bailout, but a firewall, I'm still against it.

Let's remember, as the WaPost story indicated, many people buying homes on subprime or alt-A notes were NOT lower-income people buying "starter" homes, but either people buying mini-McMansions for their first homes or residence homes beyond their first-purchased home, or even worse, people buying speculative real estate.

As for those homes already in default if not foreclosure, my off-the-cuff guess is at least one-third are of the "no mercy deserved" variety.

Posted by: SocraticGadfly on December 7, 2007 at 10:55 AM | PERMALINK

Great stuff; several of these comments could be on Free Republic or Townhall. They're probably right there with you when it comes to letting the "chips" fall where they may. Nice to see the country come together on a issue. No fuzzy liberal sympathy here!

Posted by: TJM on December 7, 2007 at 10:56 AM | PERMALINK

SocraticGadfly: Let's remember, as the WaPost story indicated, many people buying homes on subprime or alt-A notes were NOT lower-income people buying "starter" homes, but either people buying mini-McMansions for their first homes or residence homes beyond their first-purchased home, or even worse, people buying speculative real estate.

Good points. As usual, Dean Baker has a better approach than the government. His plan keeps people from being thrown out of their homes, but doesn't reward them for borrowing irresponsibly. It also doesn't reward irresponsible lenders, but does reward responsible borrowers. See

The Subprime Borrower Protection Plan

Bailing Out the Mortgage Market

Subprime Solution to Mortgage Mess?

Posted by: alex on December 7, 2007 at 11:10 AM | PERMALINK

Okay, call me a pedant, but the term 'ATM Machine' is incorrect. A PIN number will not work on an ATM Machine.

Posted by: Tripp on December 7, 2007 at 11:19 AM | PERMALINK

SocraticGadfly: Let's remember, as the WaPost story indicated, many people buying homes on subprime or alt-A notes were NOT lower-income people buying "starter" homes, but either people buying mini-McMansions for their first homes or residence homes beyond their first-purchased home, or even worse, people buying speculative real estate.

Good points. As usual, Dean Baker has a better approach than the government. His plan keeps people from being thrown out of their homes, but doesn't reward them for borrowing irresponsibly. It also doesn't reward irresponsible lenders, but does reward responsible borrowers. See

Bailing Out the Mortgage Market

Posted by: alex on December 7, 2007 at 11:23 AM | PERMALINK

Those advising people to default and walk away should probably review the CURRENT bankruptcy law AND the IRS position on debt forgiveness. There are some fairly nasty catches where you might walk away from a loan and wind up with a sizeable IRS bill after foreclosure.

That assumes that the holder of the CDO/SIV can foreclose. A lot of the players in the financial industry appear to have been really sloppy assembling the intruments to the point that a couple of courts have suspended foreclosure proceedings until the would be foreclosers can actually establish that they own the mortgages in question.

Posted by: Butch on December 7, 2007 at 11:30 AM | PERMALINK

at least one-third are of the "no mercy deserved" variety.

Where I live, huge numbers of new homes were built during the past ten years. Many of the new subdivisions cut off investor/speculative purchases after they bought 30% of the inventory.

Those speculators should not be subsidized with any bailouts. The smarts ones have probably already defaulted and walked away from their bad investments, but the really smart ones probably came up with this bailout plan.

Posted by: Brojo on December 7, 2007 at 11:34 AM | PERMALINK

I don't get the resentment about the bail-out, other than a reptilian desire to see "cheaters" get "punished."

For those who bought the "right" way, isn't it in your best interest to avoid a massive wave of foreclosures that will drive down home values? I mean, your house will lose value too.

For those who are saving up to do it the right way, do you really want to buy in a world experiencing massive foreclosure-driven depreciation? In that world, it is going to be virtually impossible to get a loan without a huge (25%+) downpayment and perfect credit. Not to mention the risk inherent in a plummeting market.

It would seem in everybody's best interest to avoid a worst-case scenario, yet people are pissed off. Odd.

(By the way, when we bought our house, we put down 10% -- over $50k -- and got a fixed rate 30 year mortgage at approximately 2.5 times our income.)

Posted by: Joe on December 7, 2007 at 11:41 AM | PERMALINK

"they bought their tickets, they knew what they were getting into. I say, let 'em crash."

Posted by: jack kirkpatrick on December 7, 2007 at 11:48 AM | PERMALINK

This issue seems to be making people a lot more conservative in thier thinking...I think this really shows that Bush is not a fiscal conservative at all...he's the big government republican...worst of both worlds...

The borrowers currently getting slammed in the subprime meltdown would like us to feel sorry for them, but I can't say (like most commenters) that I feel much sympathy. Why? Because thier irresponsible buying (and yes, you are irresponsible if you expected your low, low initial rate to still be in place after 3 years), caused the housing prices to go up, up, up.

Borrowers ask why should they be punished? How about the folks who couldn't afford to buy a home at all because you subprime folks bought a house when you couldn't afford it and drove the market up? My brother is living in a 1000 sq ft home on a postage stamp property and paid $300K for it...that is ridiculous...Perhaps if people bought within thier means (or if lenders cut people off rather than approve them for loans they clearly can not afford to pay off), then housing prices would be more in reach of the masses...

Unfortunately, we've decided as a country to live in a capitalist economic system. That does not mean that everyone gets a home regardless of means. This bailout sends a horrible message...

I believe government should step in and protect the individual from the corporation when it is reasonable that the the individual was being taken advantage of. In this case, both parties entered the deal full well knowing the potential outcome (forclosure). Shame on the borrower that went ahead and borrowed anyway and now has thier hand out...

Posted by: JPhilly on December 7, 2007 at 11:58 AM | PERMALINK

The issue is not whether it is right or wrong to "reward" bad borrowers, speculators, and lenders, but rather what is in the best interest of the whole country.

I'm not convinced it's a bad idea for speculators to get their asses handed to them once in a while, but foreclosing on as many houses as we seem to be about to may be worse for the economy as a whole (including my little part of it) than bailing out the deadbeats.

I don't know if it is worse or not, but I'd like to frame it that way.

Posted by: anandine on December 7, 2007 at 12:12 PM | PERMALINK

The banks have their hands out and Bernanke has been filling them with cheap money, which is one reason why the dollar's value has been falling. Many of the first time buyers should be foreclosed, it will save them a lot of money uselessly spent on interest and not on principal. The president and the finance industry do not want them to be relieved of the debt their realtors and mortgage brokers sold them as great investments. While I was telling people there was a bubble in real estate, the realtors and motgage brokers were telling their clients real estate always increases in value and they should make a purchase as a good investment. That was very bad advice from licensed professionals.

The president and the finance industry want people who bought bad mortgages to be indentured for the next thirty years, paying for homes not worth the purchase price with high interest rates. If that is something the president wants, then it must be a very bad thing to do. I'd say it is a signal to default ASAP.

Posted by: Brojo on December 7, 2007 at 12:25 PM | PERMALINK

What a load of nasty comments. A lot of the bad loans are from predatory lending. A lot more come from bad laws that permit companies to change terms on the fly. If our bitter Republican commentators get their way, we'll have mass forclosures and the value of their assets will plunge. If it didn't affect so many other people, I'd be delighted by that outcome. However, there are decent folks who might suffer too.

Posted by: Marc on December 7, 2007 at 12:29 PM | PERMALINK

For those warning about the fall out eventually effecting the value of homes everybody..... well yeah, that's kind of the point isn't it? The market as a whole is overvalued. That's what happens with bubbles. Unless corporations come out and universally promise 100% employment and 50k raises each year guaranteed I'm not sure how we would maintain home prices in the first place. If you look at home prices and ownership rates in this country you would think that 60% of the working population is making 150k or more a year and has had that job guaranteed for 10 years. When did this happen? Who is handing out these contracts all over?

Also, this obsessiveness over the current value of one's home is just another symptom of the out of whack mentality towards housing these days. This trend of thinking implies that a) you're a flipper or b) you intend to move or may have to move relatively soon, which begs the question of why you felt comfortable enough to by a home in the first place?

Somewhere along the way houses have become a sort of throwaway consumer good to many people. It used to be that if you intended to buy a home you were pretty serious about building your life around that area for at least ten years. Builders and lenders have fostered the short term focus by creating and financing an assembly line process for housing, but the economy isn't really built for this kind of asset turnover. Even in the best of times the job stability in this country is deteriorating, and gambling on being able to get out of a static asset like a house on a few months notice is just that...gambling.

Posted by: Condor on December 7, 2007 at 12:33 PM | PERMALINK

My radical solution: tax the hell out of Americans and Corporations who own more than one dwellings. That would kill this Ponzi-scheme mentality permanently.
Posted by: Pseudonymicon on December 7, 2007 at 9:18 AM

The risk needs to stay with the institution that originates the loan, the mortgage interest deduction for second residences needs to go away, and teaser ARMs need to go away.

Posted by: Doc at the Radar Station on December 7, 2007 at 12:36 PM | PERMALINK

Those advising people to default and walk away should probably review the CURRENT bankruptcy law AND the IRS position on debt forgiveness. There are some fairly nasty catches where you might walk away from a loan and wind up with a sizeable IRS bill after foreclosure.
Posted by: Butch on December 7, 2007 at 11:30 AM

Umm. There is already talk about tax forgiveness going on...

Posted by: Doc at the Radar Station on December 7, 2007 at 12:37 PM | PERMALINK

Can someone explain WTF predatory lending is? You're presented a contract and afforded the opportunity to review its terms and legality and discuss with an attorney and others the advisability of entering into it. Where in that process does a predator prevail?

Posted by: steve duncan on December 7, 2007 at 12:37 PM | PERMALINK

Steve, I think that the real predatory aspect is the originator of the loan isn't stuck with the risk. All they're doing is creating a piece of paper they are going to sell and making money originating the loan.

Posted by: Doc at the Radar Station on December 7, 2007 at 12:40 PM | PERMALINK

I think the point many of the posters on this thread are trying to make is that nobody forced these people to take out these loans. They did so because they were either ignorant of how the loans actaully worked (in which case they should have hired a lawyer), or greedy in trying to buy houses that were more expensive than they could really afford (in which case they're reaping the consequences of their actions).

Nobody forces you to sign a contract...if you don't understand it or are financially incapable of dealing with the worst-case scenario (i.e. rates go up, home values go down), then you shouldn't have signed it.

From my perspective, it's just another example of too many people trying to live above their means and getting themselves in trouble...if you can't afford something, you can't afford it. Period.

Posted by: mfw13 on December 7, 2007 at 12:45 PM | PERMALINK

"Can someone explain WTF predatory lending is? You're presented a contract and afforded the opportunity to review its terms and legality and discuss with an attorney and others the advisability of entering into it. Where in that process does a predator prevail?"

When lenders and mortgage brokers target certain unsophisticated segments of the population (the elderly, the poor, etc.) -- who, on average, WON'T carefully review the documents -- with unsuitable loans precisely BECAUSE they won't understand what they are getting into.

In other words, if your business model is to find segments of the population who will be disproportionately likely to agree to bad terms and sign them up, you are a predatory lender. Lenders should make money with smart underwriting and effective marketing, NOT with identifying the rubes out there.

Posted by: Joe on December 7, 2007 at 12:46 PM | PERMALINK

Doc, there have been damn few mortgages written in the last 30 years that haven't been resold within about 24 hours of everyone leaving the table. If that's predatory lending it's an objection to business-as-usual that's lain dormant for several decades.

Posted by: steve duncan on December 7, 2007 at 12:47 PM | PERMALINK

Steve, Maybe I'm just too old-fashioned, but there's bound to be problems when the people writing the loans aren't directly connected to the risk of writing them. There isn't a balanced level of risk on both sides. The buyer is clearly taking a big risk, but the lender isn't weighing it properly at origination. I guess I would prefer it revert back to how it was done in previous decades.

Posted by: Doc at the Radar Station on December 7, 2007 at 12:52 PM | PERMALINK

Joe, if what you say is true remedies should be crafted after first identifying rubes, disoriented elderly and unsophisicated ne'er-do-wells. Of course when Uncle Sam asks everyone thinking they fall into one of those three categories to raise their hands you'll think you've stumbled into a Baptist revival on Sunday morning.

Posted by: steve duncan on December 7, 2007 at 12:53 PM | PERMALINK

Steve -

What is not business as usual is that the original underwriters are undercapitalized fly-by-night outfits. So the paper gets sold, and while there is a forced buyback if the mortgage defaults within a couple years, when a whole bunch default in short order the original underwriter goes out of business and the buyer of the paper is left holding worthless paper.

It is not fraud, but it is a very careless business practice that has become prevalent in an era of easy money. Where it starts to cross over to fraud is when you realize that a lot of these subprime buyers could have qualified for better terms, and that the mortgage originators received handsome commissions for selling unsuitable products.

If this were a NASD transaction you would see a lot of brokers forced to disgorge profits. Anyhoo, the point now is how to stabilize the situation now that the crooks and the careless have made a mess of it. Will we be rewarding the morally hazardous? Of course - it is impossible to avoid that in any government program.

Posted by: Xenos on December 7, 2007 at 12:57 PM | PERMALINK

Steve, If the person loaning the money to "identifying rubes, disoriented elderly and unsophisicated ne'er-do-wells" had to really shoulder the risk of those people defaulting they probably wouldn't be making those loans to them. That's my point. It is like somebody snatching up cars that he knows are lemons because he's got somebody willing to take a whole truckload of them off his hands honking the horn-- hurryup!

Posted by: Doc at the Radar Station on December 7, 2007 at 12:58 PM | PERMALINK

Nobody forced the banks to make bad loans either. Let the banks eat their bad debt without Bernanke loaning them tax payers' money practically for free.

This whole W. Bush plan was concocted by banks. Borrowers have no institutional power to craft a bailout for themselves. It is in the best interests of home buyers of the past couple of years to unburden themselves from the large debt of their mortgages because the purchases were not worth the prices paid. The banks know this and want the government to prevent it.

I'd just like to know how I can find the bond that was sold from loaning me money for *my* mortgage, so I can buy it back for pennies on the dollar.

This is the best solution I have read about.

Posted by: Brojo on December 7, 2007 at 12:59 PM | PERMALINK

"Joe, if what you say is true remedies should be crafted after first identifying rubes, disoriented elderly and unsophisicated ne'er-do-wells. Of course when Uncle Sam asks everyone thinking they fall into one of those three categories to raise their hands you'll think you've stumbled into a Baptist revival on Sunday morning."

True. Which is why any "bailout" should focus on protecting the market as a whole, regardless of whether those who benefit from government action "deserve" it or not.

THAT said, there should also be some effort to identify predatory lenders, penalize them for their conduct, and try to make their victims whole. But this is more a job for the court system than anything, especially if armed with appropriate laws. (For example, I'd love to see real estate fraud statutes penalize the systematic targeting of consumers with knowingly unsuitable loans where the consumers were not advised as to the unsuitability, in much the same way that the '34 Act targets brokers selling unsuitable securities.)

Posted by: Joe on December 7, 2007 at 12:59 PM | PERMALINK

shoulder the risk of those people defaulting they probably wouldn't be making those loans

This is what bothered me about five years ago, when homes that sold for $60,000 in 1994 were selling for $120,000 in 2002. I could not belive banks were loaning this kind of money for homes obviously not worth the purchase price. The banks were selling the mortgages to other investors, so they did not care if the borrowers were going to default. Then the price of these small homes went up to $200,000 and the buyers still had loans approved. Everyone I asked in the business could not explain why loans were being made with such easy terms for such inflated prices.

Posted by: Brojo on December 7, 2007 at 1:11 PM | PERMALINK

Joe, keep in mind that the primary market-maker for many of the most reckless underwriting outfits was
Goldman Sachs. The same outfit that somehow avoided being caught holding any of the big shitpile paper that brought its competitors enormous headaches. The same outfit that supplies our Treasury Secretaries and our most prominent financial journalists.

Don't plan on any justice heading their way, tho.

Posted by: Xenos on December 7, 2007 at 1:12 PM | PERMALINK

Steve your ignorance of life in modern America is breathtaking.

Let me explain how a young couple can get talked into buying an ARM. One Sunday afternoon a young couple with a new baby on the way, finds a nice little house in a suburb in a good school district. They want to buy the house. The house is overvalued, they know they don't have the 20% to put down. Because they are young they have a poor credit rating and they don't have much in the way of assets. In earlier times they would have to settle for something less or the seller would have to back off the price.

This is 2004 and not 1984 so the real estate sales person steers the young couple to his friend the fast talking mortgage broker. The mortgage broker says to the young couple--"we can get you in to your house with an adjustable rate mortgage with a really low introductory rate. By the time the rate adjusts you can refinance to a 30 year fixed. By that time hubby will be making more money and the house will be worth more." The young couple really wants the house. They buy it. They are young and don't realize that incomes are stagnant as hell. Hubby isn't going to get that raise. The money that would have normally gone to give him a raise is sent by his employer to the health insurance company. Or maybe the employer moves oversees and hubby has to take a different job. Anyway the economy is changing. The housing market has flattened out. The housing market has flattened out. Try as much as they might the young couple can't qualify for that 30 year fixed.

In the old days the local banker would have been looking out for his bank. He wouldn't have loaned any more than they could afford to the young couple. There wouldn't have been an introductory rate. They would have had to downsize their dreams the way my wife and I did 30 years ago. Why because the local banker would have been looking out for his banks future. Today, however, the big mortgage lenders bundle and sell their paper to strangers. The mortgage broker doesn't have much incentive to take a conservative long view.

You can blame the young couple for betting that hubby would get a raise or for believing that the value of their home would continue to rise, but from the stand point of the young couple when they bought the ARM I bet the risk didn't seem too great.

If you want to blame somebody, blame the health care industry for sucking off all the profits from America's remaining businesses, or maybe blame the mortgage brokerage industry for changing from a local to an international financing model. Of course, it seems you want to be a real son of a bitch and blame the young couple for dreaming the American dream.

As to the speculators Gadfly talks about, I have no sympathy. Maybe that is because I don't encounter them that often. The story I just told has happened a million times this year alone.

Posted by: corpus juris on December 7, 2007 at 1:15 PM | PERMALINK

"Let me explain how a young couple can get talked into buying an ARM."

Or even more commonly, a lot of people get preapproved for a loan first, and then shop for houses with prices around what they can borrow. At some point in the early 2000s, the baseline product for "how much am I approved for" switched from a 30 year fixed to a 3/1 or 5/1 ARM -- heck, some banks stopped selling 30 year fixeds entirely (I'm thinking of ING). A lot of borrowers didn't know or understand the distinction between the products and are screwed.

Posted by: Joe on December 7, 2007 at 1:22 PM | PERMALINK

Well if nothing else is gained from all this turmoil we can at least bury "caveat emptor" for good. Just buy whatever you want and bitch later about the small size or incomprehensibilty of the fine print. If that fails bitch about the small size or incomprehensibility of your brain.

Posted by: steve duncan on December 7, 2007 at 1:31 PM | PERMALINK

Tell it to Enron investors.

The money making scheme blew up when the banks bought other banks' bad debt filled with bad mortgages. If it were only borrowers who were in trouble, the economy would probably rebound quickly. The banks fucked up and traded their own bad loans to each other. W. Bush Americans only want to hold the consumer responsible, but the bailouts are for the banks.

Posted by: Brojo on December 7, 2007 at 1:40 PM | PERMALINK

Steve, There were people at New Century that were fired because they weren't originating enough loans. More loans just meant more money and the goal was more profits for New Century for the next quarter.

Posted by: Doc at the Radar Station on December 7, 2007 at 1:48 PM | PERMALINK

The other problem is that the mortgage brokers and banks were riding off a prior reputation of being fiduciarily responsible. Because banks did used to worry about how dodgy the debt was and didn't make loans they considered too risky. In this latest mess, they didn't really care, because the whole thing immediately got handed over to a bunch of financial engineers who sliced and diced the bundle of dodgy debts into CDOs they could stamp "AAA" on and sell in the market.

Nobody felt that they would be holding the bag when the whole thing finally burst, so no one really cared. No one on the lenders' side realized they had any skin in the system.

And now everyone is discovering that risk can't be gotten rid of, it just contaminates everything...especially if it's leveraged risk.

Posted by: grumpy realist on December 7, 2007 at 1:52 PM | PERMALINK

Let me explain how a young couple can get talked into buying an ARM. One Sunday afternoon a young couple with a new baby on the way, finds a nice little house in a suburb in a good school district. They want to buy the house. The house is overvalued, they know they don't have the 20% to put down......


Hello. This is the part where they should reconsider buying a house as option. Most haven't and that's in part how we got here.

The problem being that most people have bought into the notion that home ownership is somehow expected, a right or just the smart thing to do. Financial stability in this nation's current economy is a fleeting thing, and unless you are self employed with a stable trade you will likely be subject to a kick in the nuts in the job market every three years as the business cycle resets. Planning your financial well being around getting a raise is not only laughably absurd, but the sign of a deeper plague in the nation's mentality. Instead they should probably be planning their financial future around "where will I be working in three years, or how long will I be out of job."

The job market instability that arrived in the late 90s hasn't gone away, it has just been covered up by the easy money environment of a very loose fed under Jr. If you ignored that fact or simply aren't the type of person to bake that kind of factor into your decision making then its probably something of a shock when the rug is being pulled out, and its precisely the reason some other people seemed to choose to "suffer or go without" during the boom days.

Posted by: Condor on December 7, 2007 at 1:53 PM | PERMALINK

A few years ago Washington Mutual refused to refinance my ARM mortgage (which they held) into a fixed rate. They only offered to give me another ARM. Their story was that it was a “jumbo”, so they couldn’t flip it to Fanny Mae or Freddy Mac. This is nonsensical, as they could offer me a “portfolio” ARM, just not a “portfolio” fixed rate. Maybe they were giving all the fixed rates to insiders and friends. Fortunately for me I was able to pull a few strings and get a fixed rate at another bank.

Posted by: fafner1 on December 7, 2007 at 1:56 PM | PERMALINK

this is the part where they should reconsider buying a house as option

That is correct, but if they asked an expert in real estate or in mortgage brokering the advise they were given was to buy now before prices went up even higher. Licensed realtors and regulated financiers were giving expert advise to their clients to take out ARM's and no principal mortgages to purchase homes that were not worth the purchase price.

Posted by: Brojo on December 7, 2007 at 2:04 PM | PERMALINK

I agree with some comments here regarding attitudes towards home ownership. In my youth homeownership by very young couples or individuals was not the norm. You waited until you were stable in your career, until you fully understood the financial impact of a child or two on your finances, until you'd saved a bit of money and most importantly until you'd just generally "paid some dues" as the saying goes. Two 25 year old people a couple years out of college with a newborn were nuts to be buying a house. You RENTED. At that age you can't even be sure where you might be living year to year if you're in a good job. Moving up often means moving on. My child has been instilled with all the above. Do the same for yours.

Posted by: steve duncan on December 7, 2007 at 2:08 PM | PERMALINK

That is correct, but if they asked an expert in real estate or in mortgage brokering the advise they were given was to buy now before prices went up even higher.

No doubt, but I would include another group which was probably doubly responsible for pushing the mania; friends, family and or other existing homeowners. Peer pressure combined with financial self interest and delusion generated an environment where even those close to you shared an interest in seeing you buy.

The mania of keeping up with Jones in the next cubicle or with your cousin in Florida was as much part of the fuel as pusher realtors and mortgage brokers.

Posted by: Condor on December 7, 2007 at 2:17 PM | PERMALINK

The Joneses were applying peer pressure, but they were not taking a percentage of the sale. The realtors and mortgage brokers were giving advise that was in their economic best interest to give. Since they are licensed and regulated professionals, they have much more responsibility for this housing mess. I would like them to take some financial responsibility for it.

Posted by: Brojo on December 7, 2007 at 2:27 PM | PERMALINK

If someone keeps feeding the pigeons, they will continue to show up and eat no matter how much you yell at the pigeons.

Posted by: Doc at the Radar Station on December 7, 2007 at 2:29 PM | PERMALINK

Once upon a time 30 years ago when America was, well, America, the raise would have come though, the job would be stable, and the future looked bright. When I was young I would have done just fine with that ARM. Houses were appreciating and my raises came with regularity.

My kids don't live in that world. Today after 25 years of mostly Republican stewardship the America most people experience is one of economic stagnation at best or more likely decline. The only people who feel America's economy is booming are the rich and well connected. Most people are not financial experts. Most young people talk to their parents. We are not living in our parents world. I still don't blame young people for wanting to live well even though I agree with much of what condor writes.

Posted by: corpus juris on December 7, 2007 at 3:08 PM | PERMALINK

Doc - there's TALK of tax forgiveness going on. And given the current administration I suspect some already well to do people will be even more well to do once it goes through. The majority of the people in mortgage trouble - probably not so much.

Posted by: Butch on December 7, 2007 at 3:56 PM | PERMALINK

Butch, the price drops on the most expensive houses seem to be taking the highest % drops. I remember a link here not long ago that discussed the real estate market in Grosse Point, MI. There were mansions up there which were losing $100K a month in value. If they get counted in the bailout that is a big chunk of tax they aren't going to be paying.

Posted by: Doc at the Radar Station on December 7, 2007 at 4:36 PM | PERMALINK
Which is why any "bailout" should focus on protecting the market as a whole, regardless of whether those who benefit from government action "deserve" it or not.

THAT said, there should also be some effort to identify predatory lenders, penalize them for their conduct, and try to make their victims whole.

Those aren't two separate things: the way to stabilize the system isn't a bailout, its systematically defining and targeting "predatory" lending, making existing abusive loans dischargeable in bankruptcy (replaced with a lien that must be satisfied prior to transfer for the unpaid principal). A bailout sends a message that encourages future reckless borrowing and abusive lending. Targeting abusive loans specifically and providing relief from ultimate hardship encourages lenders to alter the terms before borrowers go bankrupt, requires no bailout, and stabilizes the system more effectively than any bailout would.

Posted by: cmdicely on December 7, 2007 at 4:53 PM | PERMALINK

I sympathize with those who felt that buying a house rather than renting was worth a big personal risk.

As a home owner now of some 14 years, I found that it was extremely cost effective to own rather than to rent. As long as you can make your payments, you get a tax break on the property tax and mortgage interest, and everything that you don't get a tax break on becomes equity. Land may fluctuate in value, but they're not making any more of it so it will always have value, and that value, even in a cooled off market, will still appreciate faster than a lot of other, riskier investments.

The actual value of my house is unimportant, since I didn't buy my house as an investment. I bought it because I wanted a place to live that I could not eventually get kicked out of, which happened with all the rentals I occupied over some 20 years. The only number that is important to me is how much I have left to pay on it and how fast I can get it done by paying extra principle every month.

If I had to rent my house right now at market rates, it would cost me about two and a half times my mortgage payment. I expect the rental market to soften as foreclosures have to be filled with something that pays, but it will never drop to the amount of my mortgage payment, and I will always control my occupation of my home.

Posted by: Repack Rider on December 7, 2007 at 5:02 PM | PERMALINK

As observed in recent experiments with some primates (capuchins?), what they all got really excited about was what they perceived as unfait reward; i.e. favoritism.

It's pretty obvious to most when it appears. Not, seemingly, to this dysfnctional group of yahoos running the country.

Although we believe in caveat emptor up to a point, we also recognize when people are victims of a rip off. And there's a certain proportion among these sub-primes that were innocents who have been stripped bare by unscrupulous mortgage brokers. Ameriquest, anyone?

It's obviously too much trouble for this administration to go afer those who should never have been allowed to do what they did, but walked away with the loot.

There is nothing in this country that this administration doesn't believe is impeded and hogtied by any oversight, regulation, or compliance.

Posted by: notthere on December 7, 2007 at 7:34 PM | PERMALINK

"...five years ago, when homes that sold for $60,000 in 1994 were selling for $120,000 in 2002. I could not believe banks were loaning this kind of money for homes obviously not worth the purchase price. The banks were selling the mortgages to other investors, so they did not care if the borrowers were going to default..."

Posted by: Brojo

Don't forget that the banks continued to service the loans (with a tidy fee), but passed the risk of the loan itself on to the investors. It made no difference to the banks if the borrower was credit worthy. They were going to make money regardless.

And yes, it was most certainly predatory lending as there was little or no effort to give the buyer the best loan product for his situation (there are hundreds of different loan products available with any major bank). Instead sales and offer originators pushed the product that gave them their highest commission.

Personal responsibility my ass. How about some corporate responsibility and accountability.

Posted by: Ex - Republican Yankee on December 7, 2007 at 7:40 PM | PERMALINK

first, YEAH dicksknee and all the other folks here that are pulling for the little guy! Bravo! You've earned brownie points in heaven. Thanks for being outstanding members of the human race.

next, here's a question...

i have a fixed mortgage at a great interest rate that i am in no danger of defaulting on. But it's through one of the notorious lenders (Countrywide). if Countrywide is servicing my loan along with a heavy load of defaulting loans, is there the chance that they could sell my loan? if they did, could they make me renegotiate my terms? could Countrywide go bankrupt and what would happen to my loan then? is this anything to be worried about?

Posted by: marydem on December 7, 2007 at 8:54 PM | PERMALINK

If I understand correctly, presently many people with ARMs can afford their payments (just); it is the increase they can't afford. The simplest way would be to set up a mechanism that allowed ARM-financed mortgages to be refinanced as 30-year fixed rate mortgages without any penalties. It wouldn't surprise me of most of these refinanced mortgages weren't at 8-10%; a decrease from the ARM interest rates, but still higher than the average mortgage loan.
And after several years the borrowers could refinance at a still lower rate (should there be any) if they want to.

Posted by: Doug on December 7, 2007 at 9:00 PM | PERMALINK

marydem - any company that assumes your mortgage is bound by the original contract you signed. So they can't change the terms WITHOUT YOUR CONSENT - but be careful - I've had a couple of reassignments where companies DID try to get me to sign a change of terms contract without clearly revealing that that was NOT required.

Posted by: Butch on December 7, 2007 at 11:17 PM | PERMALINK

gees, butch, thanks a million. helped put my mind at ease.

Posted by: marydem on December 7, 2007 at 11:56 PM | PERMALINK




 

 

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