Bush Makes Mortgage Mess Worse
Posted at 2:14 pm on Thursday, December 6, 2007, in Uncategorized, and tagged banking, bush.
Disclaimer: I have avoided this issue like the plague because I have a mortgage, but it has come time to blog about it. Yes, it has become blog-worthy.
Hillary and the democrats would have done the same thing; actually they would have gone farther, and made it more worse. The president’s bail-out of problematic borrowers, lenders and investors in the so-called sub-prime mortgage crisis will prolong the problem, not hasten it. It is a bailout to drop-dead borrowers, corrupt lenders and sycophantic investors. It is unfair. It stinks.
I am a liberal, which supposedly means I am sympathetic towards everyone, no matter what. Well, I am not. I am not sympathetic to crack addicts. I am not sympathetic to Bush/Cheney 2004 voters either. (Those two may be related.) Nor am I outwardly sympathetic to borrowers that took out loans they knew they could not afford. That is bad personal economics, and taxpayers’ money should not be the solution.
This is a market-based problem, and the natural solution will be market-based. (Of course, legislation is needed to stop a lot of the lending tactics in the future that triggered the crisis.)
I think that what is most important here, something that gets lost in the sensational press coverage, is that no one is losing their house in this “crisis” (or most people aren’t, anyhow). In order to lose one’s house, you must own it. In reality, most subprime borrowers are paying rent to banks and other lenders. The one’s that are taking the hit — if any — are the lenders and investors. And the taxpayers should fix their problem, as well? I do not think so.
Gregg Easterbrook (a native Buffalonian) has summed this up the best in recent weeks…
When you buy a home using a mortgage, you don’t own the home: The lender is the owner until the loan is satisfied. You can’t lose something that does not belong to you! Suppose you buy a $500,000 home, then can’t make the payments and must leave. That would be a huge, awful setback for your family. But you have not ‘lost’ $500,000, as commentary suggests — that $500,000 in value would not have belonged to you until you paid off the loan.
Assuming the subprime borrower was only paying interest — a safe assumption — the borrower is losing nothing but their dignity (if they had any). The money that is being lost — if any, since the banks still “own” the home — are the lenders. And it is hard to feel sympathy — or lend help — to mega-corporations that funded risky loans, or to the investors that swooped these mortgages up.
With the president’s plan to now freeze rates for five years on loans that were originated between the beginning of 2005 and July of 2007 is absolutely arbitrary. What about those in December 2004? What about those who have already foreclosed? Can we make this retroactive?
The president (and Clinton and others too) are rewarding people for poor personal economic decisions. It is bad policy. And it stinks.
No related posts.
December 7th, 2007 at 10:05 am
I’m not sure how I feel about the proposed “fix” and whether it is a net good or not, but a couple of things:
First, yes you do own your house. The lender has a lien against the house, but has no ownership interest until/unless it forecloses. That’s an important distinction. To use your example: You are correct that if you have a house worth $500K and a $500K loan, you aren’t losing anything (except a roof over your head) if you’re foreclosed on. But when you still have that $500K loan and the house is now worth $600K, you’ve lost $100K that was quite definitely yours, in a very real and legally binding sense.
There exists a legal situation where the people living in the home do not own it until they make all the payments. It’s called an installment purchase (or other names), and it behaves very differently from the standard purchase + mortgage.
Second, the problem we have now is that the house with the $500K loan is only worth $400K on the market (using random, round numbers). So when the lender forecloses, they are actually losing money. By agreeing to forgo the higher interest rates they could get under contract, the lenders are actually benefiting themselves as compared to their other option (foreclosure).
AFAIK, and I haven’t heard a government source yet, the government isn’t providing any money for this “fix,” they just got the lenders together and convinced them to do something that’s in their own economic interest, but that they wouldn’t do individually (for fear of seeming unprofitable by contrast).
That leaves many of your other valid criticisms and questions (why just homeowners? why this time period?), but one could argue that you have to draw a line somewhere, and it’s always going to be somewhat arbitrary.
December 7th, 2007 at 10:25 am
Good points. The tax point you make is certainly valid.
I’ll rebut one of them…
A house is worth only what someone is willing to pay for it. A house is only worth 600k (up from 500k) if a buyer will pay 600k.
Secondly, if you bought your house looking to make a quick turnaround, you are speculating, and that is a risk.
If a person’s house is now worth 400k (down from 500k), that is the estimated buyer’s price. In that case, keep the house. Why take loss? Just keep making payments.
It seems to me that this is a major buy-out for people who signed risky loans. A person’s reasoning, “Well, I thought I could sell it for a profit,” or “I planned on moving anyway,” is not an excuse worth making policy over.
December 7th, 2007 at 11:53 am
Valid points. When I was talking about what the house is worth, I meant when/if the property is sold or foreclosed (sort of the same thing; lenders aren’t generally in the business of holding property, and will seek to re-sell after foreclosure, if they end up with the property).
But my point is that this isn’t policy, in the sense that the government isn’t dictating anything or providing any money, or even setting a precedent in any significant sense. Yes, some borrowers are being bailed out, but they’re being bailed out by the lenders, who stand to lose more if they don’t bail out the borrowers. It’s win-win as between them; the government just brokered the deal (so they could take credit?).
But yeah, it does rankle. I mean, where do I sign up for an eligible loan, instead of my boring 30-year fixed?
December 7th, 2007 at 12:03 pm
More good points. Bush would like to be seen as helping the average American — but the average American doesn’t have a sensational home loan.