Wednesday, October 22, 2008

Any Homeowner Bailout Will Come Loaded With Problems

mortgage bailoutThe calls for a homeowner bailout are becoming louder and louder. After all, why should we bailout Wall Street, but not but Joe Homeowner, who was the victim in all this? Then, of course, there are the financial ramifications to consider. Foreclosures are bringing down the real estate market right now, and isn’t it our duty to save it? If we save the real estate market, then we can go back to the way things were before and everyone will be happy, right? Obviously it isn’t as easy as that, but let’s look at some of the proposals and some the problems that could arise.

We will begin with John McCain’s proposal. McCain would like to see us use $300 billion, taken from the $700 billion bailout package already passed, to buy up mortgages of troubled homeowners. We would then renegotiate the terms of these mortgages to make them affordable for the homeowners. These mortgages would be purchased in reflection of the current diminished value of the properties, according to the New York Times. “Is it expensive?” McCain said of the proposal, as quoted in the New York Times, “Yes. But we all know, my friends, until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy.”

Sounds pretty fantastic, huh? Couple questions, though: How are we going to make sure that only people who truly need the help get it? It sounds like to me this plan would encourage people to stop paying their mortgage so that they could get some principal reduced and a lower monthly payment. Furthermore, why should responsible homeowners--and renters for that matter--who have been diligent with their finances subsidize the bad mortgages that these homeowners entered into? What kind of message are we sending when we start rewarding people for not paying their bills? There are many other potential issues with this plan, but for the sake of time, let’s move on to Barack Obama’s plan.

Obama is proposing that we issue a 90-day moratorium on foreclosures, according to the New York Times. So we would halt foreclosure proceedings for 90 days in order to accomplish what, exactly? I’m trying to figure it out, but all I can get from this is that we are giving these homeowners 90 more days to live in their homes rent-free at the bank's expense. Is this a new version of economic stimulus we are trying to get banks to pay for? The problem is, because the government now controls Freddie Mac and Fannie Mae, taxpayers are going to be on the hook for a good portion either way. So, really, what’s the point? I assume that they are trying to encourage lenders to work out a deal with the homeowners, but how successful do we really think this is going to be?

The biggest positive I think I see in this plan is that it will force banks to work with short sale buyers. Right now all I’m hearing (I personally don’t do short sales anymore for this exact reason) are horror stories about how all these people are trying to buy short sale properties, but the banks just aren’t cooperating. If they are going to have to sit on these properties for another 90 days, that might be enough to motivate them to make a deal. What does this really accomplish for the economy, though? We would have fewer people with foreclosures on their credit reports, but really, this isn’t preventing a property from hitting the market, it is just selling the property earlier on. For the most part, I see this 90-day moratorium as simply delaying the inevitable, and something that people are just going to unscrupulously try to take advantage of. For the clincher, though, let’s look at Obama’s own statement against this plan from back in February, as published by the Los Angeles Times:

“A ‘blanket freeze,’ Obama added, might ‘drive rates through the roof for those trying to buy or refinance. Experts say the value of homes will fall even more, and even more families could face foreclosure.’” It’s got to be hard to argue with yourself, but I think the February Obama is right on this one.

There are lots of other ideas being thrown around as well, but every one of them has flaws. Frankly, I don’t see how it would even be possible to create a plan that works for everyone. Somewhere along the way, someone is going to get screwed; unfortunately I don’t see how it isn’t going to be renters and responsible homeowners. Any bailout plan is certain to reward the people who simply don’t deserve it. Maybe we should send out tax rebates to everyone who is current on their mortgage or rental payment instead--at least that would encourage the right set of principles. The problem, of course, would be that these responsible people are the same ones who would put that rebate check right into savings instead of spending it on useless stuff. Again, no plan is going to be perfect.


Dead End said...

Consider this, currently home prices are vastly out of parity with personal incomes, costs of renting and historical norms.

Clearly, we are in a situation where the normal cycles of home price appreciation are at artificially high levels, even after 2 years of declines.

Maintaining those high price levels will likely lead to higher than normal inflation as incomes rise to meet the needs of buyers coming into an area which will cause other goods & services to become more expensive and thus real income will not be growing.

As stated in this article, why should responsible people be subsidising the irresponsible? I would suggest that in the case if the renter who was priced out of the market, an individual bailout would be like using their tax dollars against them. Where is the equity in that?

Anonymous said...

Thank you for this blog post. I am one of the (furious) 'responsible homeowners' who was tempted by a sweet rate on an ARM, but knew better, and was willing to trade some extra $ for predictable payments and security. I see perilously few articles about the unfairness of a homeowner bailout. I don't like the idea of banks renegotiating rates for people, but I could live with it. What I can't live with is the idea of these homeowners getting new mortgages at the current market value of their homes. That means that not only are taxpayers covering the difference, but banks will get the complete payoff on the mortgage and, when I go to sell MY house, I'll be competing against people who can put theirs on the market for much less, because they owe less on their mortgages. People like me will take the hit twice - once with tax dollars to cover the renegotiation, and again when we have to sell our homes in competition with people who got bailed out.

To think that I am going to have to pay for the McMansions of irresponsible yuppies and the multiple houses/mortgages of real estate speculators really infuriates me! This country no longer rewards innovation or personal responsibility, and that's really not the kind of environment that I want my children (when I have them) to grow up in. Forget not paying the mortgage - it's enough to make me not want to pay taxes, either! A corrupt, backward government like this one does not deserve the fruits of my labor. Why aren't more people angry about this? Why hasn't there been a populist uprising like there was with the bailout in Congress?

Anonymous said...

I think there are a LOT of people angry about this, but the representatives we currently have either don't care (Barney Frank) or don't know enough about what the implications really are (Barbara Boxer/Diane Feinstein CA, respectively).

I'm a renter, and I sure as HECK don't want my taxes to subsidize welfare for the "supposedly" rich homeowner. A realistic way to solve this problem is for people who could not afford these bubble-priced homes are either to leave or be foreclosed on. The only real way for the housing market to 'stabilize' is for house prices to drop to where fundamentals used to be with income 3-4 % not this 10-15+ % which we have now. People can not sustain paying 10+ more of their income on housing; it leaves little room for anything else.

I have a growing family, and I would personally like to see my tax money spent on education, roads, and sustainable fuel sources. Heck, any type of infrastructure so my children and their children and their children's children have an actual America in the future, and not this boatload of debt provided for us by greedy and unethical folks ranging from Wall Street, to mortgage brokers, to appraisers, to the Joe-Signed-The-Dotted line (with or without understanding, and with or without lying).

Anonymous said...

If we're going to bail-out the sub-prime borrowers, let's do it this way. Please read the entire plan before drawing judgement.

As homes enter pre-foreclosure, the Federal government buys the home from the bank at some fraction of the amount owed (short-sale). A new loan is made to the homeowner based on the homeowner's ability to pay. The government then places a lien on the home for the difference of the new loan from the original principal plus an additional 10% penalty. Then, as home values rise, the sub-prime borrowers do not profit from the government's intervention since they must pay the lien in order to sell the home. The 10% penalty combined with the short-sale purchase from the bank pays some of the government’s expenses when the home price eventually recovers and is sold. If the borrowers are unable to move from their homes until housing prices recover, that is the penalty for their borrowing negligence as evidenced by their sub-prime status. This is fair since those of us who made prudent financial decisions will face losses if we choose to relocate before the market's recovery.

This approach addresses a flaw in the Housing Rescue Bill signed into law on July 30 and all the other plans that our "representatives" are putting forth. That flaw is that those whose loans are restructured can profit as soon as prices begin recovering, although they must split that profit with the Government. This is fundamentally unfair to those of us who have good credit and invested our hard earned funds as a down-payment. In my proposed plan, these homeowners will not profit until prices have recovered to the levels at the time of purchase. This is the same situation that responsible borrowers currently face less the 10% penalty. This approach also penalizes the lenders since they must sell short.

I think you would find broad support amongst taxpayers for a plan like this since it penalizes both the lenders and the borrowers who are jointly responsible for the current economic situation.

Why won’t this work? I have sent copies of this plan to my representative in Congress, both of my state's senators, the White House, the office of the Vice President, Barrack Obama, John McCain, and Neel Kashkari at the US Treasury. Everyone who agrees that this might work should copy it and send it to their congressmen and senators.

Anonymous said...

Seriously there is going to be plenty of problems on how to regulate the decisions of who gets help and who doesn't. I am sure a home flipper would not feel any remorse in trying to get some help on his 3 homes that are about to foreclose. trying to get an open forum so we can discuss these issues going.

Anonymous said...

they can renegotiate the new value of their homes but that difference (cap at $50,000) amount should be added to their taxable income for the life of the loan. This new surplus is divided up for responsible owners to add on to their deductions. Also their children's applications for state higher ed should be flagged as NOT ELIGIBLE for any subsidies...go and pay a private tuition. More $$ for drivers licenses, passports, stamps, car loans at a set 13% if you got to renegotiate... create a whole f+&%%% class of people smeared with pesky IGRN penalties that they have to deal with till its over and oh yeah voting from 22-42 only.

Anonymous said...


Hmmmm... that's not a bad idea at all. It certainly makes me feel a lot better about it. I still think, though, that most of those people would still just foreclose and walk away, leaving the government (read: taxpayer) holding the bag. But hell, if we're going to be shelling out the cash either way, what difference does it really make? At least your plan seems to keep the homeowner on the hook longer/better.