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September 23, 2008

Pop Quiz: Including Homeowners in the Bailout?




Posted by Brownstoner at 9:46 AM | Comments (39)
Categories: Market

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Wow, we're divided. I said no. Think about it. Take each distressed "owner" case by case. What IF they cashed out at the top and kept a hefty profit. If they all of a sudden realized that they were deceived by the fine print in their mortgage docs, would they give some or all of that profit back?

They were damn sure willing to take the reward. They should damn sure take the risk. Senior citizens and all. (They are a lot more wise than we give them credit for. Dementia is the exception.)

Posted by: DOW8000SP800 at September 23, 2008 9:58 AM

there should be no bailout
for anyone

Posted by: blackstoner at September 23, 2008 10:00 AM

I should just quit my job and pretend I can't pay my mortgage - that way I can get some of the free money my government seems hell-bent on throwing away.

Posted by: heck_of_a_job_brownie at September 23, 2008 10:04 AM

That's tough one.

On the one hand, helping people stay in their homes and keep paying off their mortgage sounds great from a humanitarian perspective and it would go a long way toward stabilizing the economy.

On the other hand, using my tax dollars to help out the people who borrowed money they couldn't afford so that they could overpay for property and help inflate the housing bubble and are (indirectly) responsible for pricing me out of my old apartment makes me sick to my stomach.

I'd like to see people who just got caught in a bad spot helped out, but if some flipper just stopped paying his mortgage because he realized he wasn't going to be able to turn a profit on it, then he should get no support at all.

I'll go with Not Sure.

Posted by: northsloperenter at September 23, 2008 10:09 AM

Unfortunately, preventing foreclosure would have the effect prolonging the housing downturn for everyone.

I would, however support something along the lines of eviction relief: allowing homeowners who have been foreclosed to stay in their homes at fair market rent if they can afford it.

This could, hopefully, help preserve neighborhood vibrancy, and help stabilize neighboring property values.

Posted by: tscola at September 23, 2008 10:14 AM

Most people being foreclosed fall into one or more of the following categories:
1) Got 100% financing.
2) Have already walked away.
3) Are so far under water they should walk away.
4) Serial refinancers who had to have the Mercedes.
5) Lied about their income.
6) Speculators/flippers.

None of the above should be bailed out.

Who should be bailed out? Perhaps the poor schnooks who have made all their mortgage payments and are not under water, but did not understand that a variable rate mortgage meant their monthly payment was going to go from $900 to $1,400. But that's about it.

Posted by: Suburbandude at September 23, 2008 10:19 AM

the bailout package should do nothing more than the bare minimum required to avoid a financial meltdown. it's not "hey, we're handing out a trillion dollars, who needs some money?" yes, it is unfair to bail out large financial institutions for their screwups while not similarly bailing out individual homeowners for theirs. but this package is not about fairness, it's about keeping the economy afloat.

Posted by: z at September 23, 2008 10:19 AM

I don't even like the word "bailout". To me it's he same as "handout".

Where is my reward for waiting until I had at least a 20% down payment and then purchasing a home I could genuinely afford? Where's my reward for being responsible? Oh that's right, I am rewarded by knowing my tax dollars are being handed out. Don't I feel SO altruistic?!

I understand each situation is different and there are certainly scenarios out there where people like my husband and I who "did the right thing" found themselves in unforeseen situations (loss of jobs, major illnesses or disabilities etc.). However, I think that is a very small fraction of this mortgage crisis picture. Frankly, I'd have no problem with them getting assistance.

Posted by: TownhouseLady at September 23, 2008 10:20 AM

And tscola, I like your idea about those being foreclosed paying fair market rent. But I don't think it should be forced on the banks.

Posted by: Suburbandude at September 23, 2008 10:20 AM

Heck of Job:

It's really a tough and scary time for people employed in financial services and I'm talking about the sub $100K crowd. The degree of consolidation that has occurred in just ONE week means that the will be a serious contraction of the jobs available. If you've worked in the financial services industry for all of your working life, it will take time to transfer the skills to another industry. To be sure, they won't be making the kind of the money that will help them keep pace with the rent increases on the horizon and the dream of living in the neighborhood that they grew up in, has slipped beyond their reach. Just ask any kid from an average family who grew up in Park Slope or Windsor Terrace in the seventies and early eighties. They can't believe that Aunt Sally's house has sold for more than $500 K, much less a million.

Here's the irony. Can you imagine how much criticism Bush and his cohorts would have heaped upon a Democratic administration should they have been present when this market collapsed? They (ie. Bushies) would be fighting tooth and nail against it.

Bail out, how about the breathing room that comes with a renegotiation of terms?

Posted by: BrooklynIsHome at September 23, 2008 10:21 AM

interesting none of the strong supporters of homeowner relief are piping up too loudly.

guess deep down, its hard to stand up in public and say you love capitalism and freedom, but hate personal responsibility, and when you doinked your life due to stupidity/greed, you want daddy to come help you.

Posted by: goldie at September 23, 2008 10:24 AM

Next year I don't feel like paying taxes.


Posted by: Prodigal_Son at September 23, 2008 10:27 AM

No, bailouts will just encourage the same type of behavior that got them into this mess.
I agree with all your points suburbandude except I don't have sympathy for people who do "not understand a variable rate mortgage." Anyone who has the privelage to buy a house and get a mortgage should do their due diligence and read the fine print. I guess the only people I feel bad for are those who suddenly lost their jobs and ended up in a situation where their house would not sell but I imagine this is not the demographic we are really looking at.

Posted by: offthegrid at September 23, 2008 10:32 AM

Nice and thoughtful response, BrooklynIsHome. Unfortunately, it doesn't change the fact that this mess was created as much by our irresponsible action as it was by the current administration's blatant incompetence. I really can't feel bad for people who made a 30-year or so long commitment but got too lazy to open up Excel and check their math. Even when you try and explain these very basic things to them, and even do their math and research for them (my brother and his wife), and even when you explain to them that there is no magic in the world of finance... they still go and take out a neg-am mortgage.

Posted by: heck_of_a_job_brownie at September 23, 2008 10:44 AM

This is so difficult. TownhouseLady, I have very similar sentiments. Where is MY reward for NOT buying because I just couldn't afford it (in my world, "affording it" means 20% down, a 30-year fixed term mortgage, and the ability to be a responsible homeowner -- and have a life -- beyond paying the mortgage) and refused to enter into a "funny money" mortgage. At the same time, I have one friend who made a series of foolish decisions and is now 85K in credit card debt -- AFTER selling her house. Another friend who wants to move but can't because she can't sell her house. Another friend who can just make the payments on her house but can't afford the new property taxes. When I talk to these friends, my heart breaks. But when I pull back and look at the larger picture, I support only doing what is required to keep our economy from completely collapsing, punitive action against those who caused this crisis, and letting the rest of the cards fall where they may. I survived growing up in this city and going to public school in the '70s, I feel confident I can ride this out too.

Good luck everyone.

Posted by: I_haz_TWO_toilets at September 23, 2008 10:44 AM

There is no reward for being frugal and not buying. no bailout, no handouts, no tax deductions for mortgage interest. No reward except peace of mind.

Posted by: dittoburg at September 23, 2008 10:56 AM

"Even when you try and explain these very basic things to them, and even do their math and research for them (my brother and his wife), and even when you explain to them that there is no magic in the world of finance... they still go and take out a neg-am mortgage."

Which is exactly why these industries need to be more tightly regulated.

Everyone hates to say this, but a large enough percentage of the American public is stupid enough or lazy enough to get into the biggest financial commitment of their lives without understanding what they have done.

About a year before I ever heard the word "subprime", my sister called me because she and her husband were getting this "great chance" to get a no-money-down mortgage that would be less than their monthly rent (which was pretty cheap).

My parents thought it sounded great and were pressuring her to do it, but she was really confused and worried.

The more she told me about it, the fishier and fishier it sounded. I convinced her it was a bad deal and that she should wait until she had enough money saved for a big down payment. If she'd taken it, she would have bought a no money down property in 2006, and if she didn't ask me for advice, she probably would have taken it.

My sister and her husband are fairly smart people, but like so many other people, they are ignorant about finance and can only really understand "monthly payment".

Posted by: northsloperenter at September 23, 2008 11:00 AM

Anyone who signed up for an ARM with 5% down was a volunteer.

I vote No for buyouts, but for criminal charges against the bankers who knowingly sold these fraudulent mortgage packages.

Posted by: buttermilk channel at September 23, 2008 11:06 AM

That's the thing though, these mortgage packages weren't technically fraudulent - at least not any more than the people who very willingly lied on their applications. Besides, I'm guessing an ARM with 5% down can work for quite a few people, e.g. law- and med- school students.

Posted by: heck_of_a_job_brownie at September 23, 2008 11:15 AM

I feel compelled to disagree with much of the above comments. The banks (Main Street and Wall Street) took incerdibly irresponsible financial risks. The instruments got so complicated and layered that some of the best financial minds can't figure out just how much bad risk there is in any of them. Yet here comes the government, like a sponge, to clean up all that bad risk and take it off of the banks' books. Whew. Glad that's over with, now the markets can return to normal.

Once that's done, however, foreclosures on mortgages backed by these instruments will now be executed, in effect, to repay the government. Our need, as taxpayers, to be reimbursed will be the force that is driving the foreclosures. We can argue ad nauseum about how many people took on too much risk versus how many were mislead about the loan terms. There is no question it was the wild west for a while. But these homeowners were no more irresponsible than the financial sector. And there is no question about the human cost. So if we are going to get the treasury into the business of ameliorating irresponsible risk, we shouldn't leave the at risk homeowners out. To do otherwise seems a bit morally dubious.

I know you finance guys will take big issue with me and tell me I don't understand the markets. etc., but that's the way I see it.

Posted by: slopefarm at September 23, 2008 11:23 AM

The banks bought the paper for sure, but it is the brokers and appraisers who bent the rules. They need to go to jail.

Posted by: ou812 at September 23, 2008 11:35 AM

slopefarm,

I agree that it doesn't seem moral to bail out the bankers but not the homeowners, but there is nothing moral about this.

We are bailing out the bankers because otherwise we could be risking massive stock and bond losses (aka, pension and 401K losses) as well as a very severe economic downturn (with layoffs, lower tax revenue, 20 years of darkness, dogs and cats living together, etc. etc. etc.).

Basically, the finance industry built a big, giant, but shoddy dam up the river from where we live. The dam is starting to fall apart, and they can't fix it.

We have two choices: go fix the dam for them or get flooded.

Posted by: northsloperenter at September 23, 2008 11:38 AM

AS far as I understand, the problem is that many homeowners can't be helped - most troubled mortgages are the ones with adjustable rates and most of those were the sliced and diced ones, so can't be put together again to lower interest rates etc.

Posted by: gkw at September 23, 2008 11:38 AM

I agree with you to a point Northsloperanter. I have seen my "smart" friends make very foolish decisions with regards to finance. Most of them only hear what's pleasing to them. These are the same friends who continue to sink deeper into credit card debt because they think that if they continue to switch the debt from card to card (with the 0% interest for the first 6 months for balance transfer offers) that they're getting over on the CC companies. Are they choosing to look the other way? In my opinion yes.

When we first went shopping for a mortgage the broker was VERY eager to sell us an exotic mortgage. We actually got pre-approved for double what we end up paying for our home. We were also offered the ARM's, Interest First, and low/no-money down mortgages.

The difference was, before we even considered buying we did a LOT of research and realistic math. We could have been in a home YEARS before if we had bought into the sales pitch. We held off and saved and saved and then we saved some more (just in case). When we did buy we didn't overextend ourselves. We bought in the Jersey City brownstone area rather than Brooklyn. Why? because even though the mortgage co. said we could afford it WE knew we couldn't. I'm on the same page as I haz two toilets...

"I support only doing what is required to keep our economy from completely collapsing, punitive action against those who caused this crisis, and letting the rest of the cards fall where they may."

Posted by: TownhouseLady at September 23, 2008 11:44 AM

That was an unfortunate typo northsloperenter. I was NOT trying to imply that you'd ranted. Sorry!!

Posted by: TownhouseLady at September 23, 2008 11:47 AM

I voted "not sure." Maybe I should have voted "sometimes."

If a homeowner was able to make payments at the "teaser rate" but is not able to at the new higher rate, banks should be forced to give a market-based rate appropriate for the riskiness of the borrower rather than foreclosing. IMO, teaser rates were extremely misleading, bordering on fradulent. Lenders should do the right thing now.

But if a homeowner is unable to make payments on even the introductory rate, then the bank should not be forced to make a deal with that deadbeat.

On the other hand, in some markets, it would be to the bank's advantage to make a deal, even with borrowers tremendously overextended. It is not in the bank's interest to own distressed properties in collapsed markets like some in Nevada and California. Banks may prefer to give 40-year terms or make other extraordinary concessions. During the Texas recession in the early 80s, banks pretty much stopped foreclosing for a few years. Once things got better, they started making deals and foreclosing again.

The other complicating factor is that many of these defaulting homeowners are now in a negative equity situation, whether or not they can afford the monthly mortgage payment. In some markets, even if the homeowner put down 20%, that 20% may have evaporated in these last months. Nobody wants to hold that bag.

Posted by: Brooklyn Chicken at September 23, 2008 12:06 PM

NSR,

Didn't mean to scare you too much yesterday about homeownership on the other thread. You, too, can learn to flash and caulk. I hope circumstances and market conditions allow you to take the leap when you are ready (and that you find a house you like).

I agree there is nothing moral about the bailout. That's my complaint. I know the markets, and all of us, by extension, need some form of emergency response, quickly and badly. But that also creates leverage for the government, which government would be remiss if it didn't use for good. That leverage could be to exact reforms and it could be used to help people. So I think the debate is simply whether that leverage should be used to help prevent foreclosures. I think it should, for the reasons I set forth above. There were enough unsavory practices on the lenders' side to make me willing to throw all homeowners facing foreclosure under this particular bus. Perhaps those that materially lied in their applications should be exempted. And perhaps the degree to which a given mortgage can be revised should be circumscribed. But I think it would help not only lots of individuals in need, but also the communities in which they live, if we could use the political leverage of the bailout to prevent some foreclosures.

Posted by: slopefarm at September 23, 2008 12:07 PM

slopefarm -- I hear you.

If the govt. is going to give the banks $700,000,000,000, the banks should be required to make good faith efforts to negotiate new deals with homeowners (assuming they bought the property as a primary home and would like to keep living there).

Giving the current homeowner a new mortgage (a sensible, fixed rate, 15 or 30 year mortgage) for something close to fair market value for the property is better for the bank, homeowner, and society than a foreclosure.

The bank may have to write off 20-30% of the original mortgage, but they'll have the $700,000,000,000 to help ease the pain for them.

Posted by: northsloperenter at September 23, 2008 12:29 PM

NSR, I'm not sure how you'd go about doing something like that. Does that mean I can pretend that I can't pay my mortgage and get a better one?

Posted by: heck_of_a_job_brownie at September 23, 2008 1:00 PM

"Does that mean I can pretend that I can't pay my mortgage and get a better one?"

Yes.

Liars and cheats will definitely be able to get their hands on some of that $700,000,000,000.

Probably best to just start with that as a given and then go from there.

Efforts should certainly be made to verify income of people asking for help and it wouldn't hurt to put some nasty penalty clauses in the refinance contract (e.g., penalties for selling in the next 5 years, make it very hard for the loans to be wiped out by bankruptcy, increased taxes on the property when it is sold, etc.), but, at the end of the day, someone will figure out a way to pocket some of the money.

Pretty much any time the govt. gives money away you can be sure that will happen.

Posted by: northsloperenter at September 23, 2008 1:14 PM

HJB,

The proposal being considered is to give bankruptcy judges the power to rewrite mortgage terms. So if you want to doctor up your finances so it looks like you can't pay the mortgage, submit that to a federal judge and take the chance that (a) you will be found out and held in contempt, or (b) you will be believed, the court will grant your bankruptcy petition, you will get the mortgage rewritten, and you will have the constraint typically placed on bankrupts, not to mention the effect on your credit, go ahead. I think the system being proposed for mortgage relief will have more external and self-regulating constraints than the ensuing debate suggests.

Posted by: slopefarm at September 23, 2008 2:49 PM

"Liars and cheats will definitely be able to get their hands on some of that $700,000,000,000."

You betcha - which why we especially need oversight on this, and to not give Paulson a blank check.

Posted by: cobblehiller at September 23, 2008 3:17 PM

This debate is academic. If the bailout is not passed we are a few days from financial meltdown.

After it is passed, you can all continue to debate its many perverse consequences.

Posted by: lechacal at September 23, 2008 3:25 PM

So if you cannot afford your mortgage despite it being fixed at 5.85% should we bail that person out?

If I took out a loan and then bought a new car, boat and jacuzzi, should I be bailed out for being fiscally irresponsible?

What would reasonable parameters be?

Posted by: bmfesq at September 23, 2008 3:31 PM

Slope, I wouldn't need to lie - just quit my job (or get fired), re-negotiate my mortgage terms, then find a new job. Granted, none of that is easy, and quite honestly I wouldn't go through all that trouble. And as far as my credit score, in 7 years, or however long it takes to clear up one's record, banks will be chomping at the bit to give me a mortgage and a credit card, since the economy will likely be in another upswing/bubble and once again they'll have more money than they know what to do with.

Anywho, what upsets me about the whole situation is the complete inability and unwillingness of the Americans to live with the consequences of the decisions they had made. We are, indeed, a nation of whiners.

Posted by: heck_of_a_job_brownie at September 23, 2008 5:41 PM

"Anywho, what upsets me about the whole situation is the complete inability and unwillingness of the Americans to live with the consequences of the decisions they had made. We are, indeed, a nation of whiners."

What are those consequences?

That's the $700,000,000,000 question, isn't it?

Posted by: northsloperenter at September 23, 2008 7:15 PM

If you're going to bail out one pack of frauds, you really ought to bail out the other.

The banking CEOs who got us into this were no more financial "experts" than the yahoos who accepted these loans in the first place. I'd say let them both burn, but I think that the overall cost would actually be higher in the long run. So grumpily, I say bail 'em both out. No playing favorites.

Posted by: evnyc at September 23, 2008 10:26 PM

I know I will sound a little ridiculous after making quite a few oversimplified statements here, but can we please not oversimplify this situation? If might feel good to try and stick with what's "moral" and not play favorites, but that will only exacerbate a pretty dire situation, as far as the taxpayers are concerned. So here's another oversimplified and non-nuanced statement from me: can we do just the bare minimum to keep the economy afloat? And can we please learn our lesson already and next time not vote for a guy whose best credentials are his very public belief in Jesus and a direct phone line to God?

Posted by: heck_of_a_job_brownie at September 24, 2008 8:31 AM

"can we do just the bare minimum to keep the economy afloat? And can we please learn our lesson already and next time not vote for a guy whose best credentials are his very public belief in Jesus and a direct phone line to God?"

Whether or not you can do the bare minimum depends on the type of problem.

If the problem is like a dam that is about to break in 1,000 places, then, no, you cannot do the bare minimum. You must completely reinforce the entire structure. Fixing only 400 or 500 or even 800 places would be pointless because once one of the remaining weak spots broke the whole dam would get washed away anyway. You'd be better off not trying at all.

As for your second query, as long as the democrats refuse to believe how stupid a very large percentage of the american voting public is and learn to focus on appearance rather than substance, we will be condemned to suffer under whatever idiot the republican party decides to nominate.

Posted by: northsloperenter at September 24, 2008 9:27 AM

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