Underwater Bailout
Feb 19, 2009 by
OCSteve
Not sure what I think of the administration's homeowner bailout. Irresponsible financial institutions and irresponsible car companies are getting bailouts though...
And I think we are talking about "irresponsible". In many cases, someone either bought more house than they could reasonably afford or were trying to flip. I have some sympathy for the former (not a lot) and none at all for the latter (as they helped cause the problem).
By instinct I am ag'in it. I bought a house; lived there for many years, made my payments, put the money and effort into maintaining it, and yes, sold at a profit. But that was 9 years equity. I bought a condo, lived there for 8 years, now I am getting that ready to sell (OCSteve = ??Steve). The market sucks, but I am not going to lose money.
We're slow and careful with finances, keep our debt down, and resist buying until we can mostly pay cash. I don't have a lot of sympathy for folks who can't understand those few simple financial rules. It means you don't get immediate gratification. You don't get everything you want the day you want it. You don't buy the big-screen TV because you're just going to die if you don't get it today even though you have a perfectly functional TV at home. It takes discipline and yes it sucks. Us big boys love our toys... (I'm not talking about folks stretching to put food on the table to feed their hungry children - I would do anything myself. I'm talking about financing a better lifestyle than you need or can pay for.)
Now to be clear - of course there are exceptions. People who are out of work through no fault of their own... People with medical problems and no insurance; People who unexpectedly get into severe debt. Let's help them out. I may be there myself someday soon. Not by a bailout, not by forgiving the note - by suspending it for a couple of years. Freeze the interest as well. If they get back on their feet then payments pick up where they left off. If they don't - the taxpayers eat it (like so much else these days).
I know we have some renters here. I'm curious how they feel about bailing out homeowners who overreached. And let's be frank - with the mortgage deduction I have ridden on your back for almost 20 years. I still paid more interest than I saved in taxes, but you subsidized me while I built equity and I made out pretty good in the end. A couple of times... Now you're going to subsidize folks who were not even as responsible as me...
All the above is stuff I don't like.
OTOH, things seem dire. I don't know if pulling the housing market out of its slump first will help the most - things I read say it might. At the end of the day though it seems like the housing market bubble is more of a symptom than a cause.
On the gripping hand, I'm most concerned we just don't have a clue what we are doing but we have to do it now now now...
Comments
Feb 19, 2009, 09:37:33 john miller wrote:
I have mixed feelings about this. Like you say there are the obvious examples of people who bought in good faith, with full ability to handle things then got hit with a major event that screwed everything up.
OTOH, like you say, there are some who over-extended themselves and just about anybody could have seen it coming. The problem here is that the lending institutions should never have made the loan in the first place, but knew they could make a quick buck and then sell off the note.
What I do find interesting is that back in 2003, the Attorneys General in just about every state were attempting to go after fraudlent lenders and were stopped by the Bush administration from doing so.
Anyway, you are correct that many people over bought, and not just in terms of their houses. One of the things that I do like about Obama is his emphasis on responsibility for everybody. It is different to hear that from a politician, particulalrly a Democrat.
Anyway, this is where the flip-flop comes in for me. There is that middle group who bought a house, thinking they could afford it even though they couldn't. But they were talked into it by an unscrupulous lender. Should they have figured it out? Possibly. But not everybody is that much of a whiz about these things. I consider myself relatively perceptive and I have been caught a few times by people who were able to talk faster than I could think.
These are the people who fall into the middle ground.
And now for a little anecdote. I was talking to a co-worker today, talking about me and my wife doing a refinance. She mentioned they had done that just before her husband lost his job a little over a year ago. He still has not found one and they have run through just about everything in savings, etc. (I should mention she is 61 and he is 56 so that is a major deal).
Anyway, although they have been able to make their mortgage payments it has been by the skin of their teeth and it is starting to look bleak. So she called her bank, trying to be proactive and see if they could do something short term to make the payments a little more manageable. The bank's response? "Sorry, we can't do anything until you are 6 months in arrears."
No further comment necessary.
Feb 19, 2009, 09:56:53 OCSteve wrote:
Agree John, and I admit I’m trying to walk a thin line here – who got hosed vs. who overextended with (should have been full knowledge). I’m going to stay away from blame because I have one idea and you have another.
Now – What to do now?
Feb 19, 2009, 09:59:13 john miller wrote:
Not really different ideas per se, just slightly different locations on the spectrum.
Feb 19, 2009, 12:27:02 Turbulence wrote:
[i]I know we have some renters here. I'm curious how they feel about bailing out homeowners who overreached. Now you're going to subsidize folks who were not even as responsible as me...[/i]
Well, this is nice and surprising to see ;-) Speaking as one of the renters, my feeling is: eh. Shrug. Renters have been subsidizing buyers for years and my hunch is that the total subsidy we're talking about here is very small in comparison with the lifetime subsidies we've already made. Since I think it is small (relatively), I'm not too worked up about it.
To be honest, I'm not too worried at the prospect of the "wrong people" benefiting from these deals. There are a lot of people who were just woefully underequipped to handle as complex a transaction as buying a house using a variable rate mortgage. In my experience, the vast majority of people just don't have the financial chops to understand the consequences of those transactions: they should have never entered into those mortgages without hiring their own attorney or accountant or certified financial planner or something. There needs to be an expert in the room with them who can read through the gobbeleygook and explain in simple terms what the banks and brokers don't want them to know. Someone who can say "Yeah, your monthly payment starts out at $1000, but in two years it jumps up to $1400 and it might jump higher still...can you pay $1400 a month every single month?"
[i]OTOH, things seem dire. I don't know if pulling the housing market out of its slump first will help the most - things I read say it might. At the end of the day though it seems like the housing market bubble is more of a symptom than a cause.[/i]
I think the goal of this plan is to staunch the bleeding. The idea is to keep neighborhoods from rapidly deteriorating as families are needlessly foreclosed out of their houses. That's it. I don't think it is intended to buoy up housing values to anything close to what they were; those values have come down a lot and they need to come down still more.
My biggest worry is that the plan will keep people in their homes when those people would be better off leaving, either because their prospects for work are better elsewhere or because their ability to pay is so marginal that even with assistance, they're going to suffer a lot. People aren't rational when it comes to houses, so optimism turns to self-delusion real quick. For lots of people in say Detroit, the best thing that could happen to them would be getting freed from the housing milestone draped around their neck.
Feb 19, 2009, 12:32:46 russell wrote:
Here's my take.
You press the reset button, and then you clean up the mess.
My wife and I bought our house with about 18% down, and took on a mortgage about 2 1/2 times our household income. 30 year fixed, no ARM, no balloons, no bullshit.
Even that was a stretch for me, personally, but in context it's a pretty conservative position.
I'd prefer if I wasn't bailing out some jerk who leveraged himself to the hilt to make his quick million, but net/net I really don't care.
Put a big, expensive finger in the dike. Wrap a big, expensive tourniquet around the arterial wound. Pick your metaphor.
Stop the bleeding, then go back and clean up the mess. By which I mean, put reasonable, pass-the-smell-test standards for lending back in place.
Then let's freaking move on.
Yeah, somebody will game it. But no matter what you put in place, somebody will game it. The world is full of jerks.
Stop the bleeding, clean up the mess, and move on.
Feb 20, 2009, 07:50:26 Phil wrote:
My only comments, useless as they are, are:
1. Not one of us here knows the proportion of "people who done fucked up" vs. "people who done got shafted" in the mix here, and operating as if we do is likely to lead to all sorts of fundamental disagreements.
2. You know what wouldn't be good for America right now? A great big bunch of brand-new homeless people.
Feb 21, 2009, 11:49:03 OCSteve wrote:
True Phil – But I had you and Turb in mind as the renters here, and I recall that you both have previously argued against preferences for home owners vs. renters. (Am I wrong?).
You are now (potentially) subsidizing homeowners more than ever before.
Just curious. Neither you nor Turb seem upset about this. I’ll defer to you guys…
Feb 21, 2009, 22:40:55 Turbulence wrote:
[i]True Phil – But I had you and Turb in mind as the renters here, and I recall that you both have previously argued against preferences for home owners vs. renters. (Am I wrong?).[/i]
I definitely argued against those preferences. I thought Phil was a homeowner though, but I could be misremembering.
My gut feeling is that there are a lot more people who got shafted than there are who fucked up. The shafting was done by many of the same financial institutions that are eating TARP money. I'm enraged at them because unlike most homeowners, they knew better. They had the understanding and experience to see that this was going to blow up and they just didn't care.
Feb 22, 2009, 04:35:55 nous wrote:
Turb-[i]I'm enraged at them because unlike most homeowners, they knew better. They had the understanding and experience to see that this was going to blow up and they just didn't care.[/i]
Pretty much.
For me it's like going to the bar. I know my limits and I stay within them and I don't drive. I also know that there are a bunch of drunks and alcoholics there and a number of people that use alcohol as an excuse to act like jerks. I try not to hang out with any of them and while I understand that there are lots of factors that lead to the behavior they engage in I don't generally feel sorry for them.
But my attitude towards them changes a bit if I see the bartender encouraging them to run up a huge tab, pouring drinks for them and letting them drive away even if it's ultimately the alcoholic who has to pick up the glass and drink it. The bartender has the power and the responsibility to cut the drunk off before they hurt someone else.
Not a perfect analogy, but it gets at some of it.
Feb 22, 2009, 05:23:39 Phil wrote:
OCSteve, I am not a renter -- my wife and I bought our house in March 2007, with less than 20% down but still a sizeable down payment, and a 30-year fixed-rate mortgage.
As far as previous arguments, the only side I took in a prior thread wasn't so much on the mortgage interest deduction, but on whether homeownership promoted stability and involvement in the community.
Feb 23, 2009, 02:31:04 DonaldJ wrote:
I might have been the other renter in the previous thread, or more accurately, someone who was a renter for most of my adult life until just a few years ago. I was bothered by the notion that homeowners were considered more invested in the community. It might be so in some cases, but then I think a fair number of homeowners might not be invested in their community either--if they don't have children they might resent paying for the public schools, for instance.
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