Can you point to specific people? Can you show, specifically, what they did that was wrong? As I’ve said, if laws were broken anywhere along the line, let’s lock them up. Otherwise, saying they did bad things amy be true, but it has as much teeth as saying used car salesmen are less the honorable. And I’m not ignoring the plight of the ultimate borrowers. But it is because the loan is so personal to them that it falls to them to be very careful. Go to your local library or bookstore and you’ll see a plethora of books telling a potential homeowner to be very careful and what to look out for. There are also magazines on the newsstands that supply the same information. There are financial shows on television that do so, as well. If you’re still unsure, you can hire a lawyer to help you. When making the what is most likely the most important financial decision of your life, you simply need to do your homework. And then you need to err on the side of prudence. Why? Because if you make the wrong decision it could change your life, and not for the better. Regardless of what regulations are in place, the final decision lies with the individual. As much as you might want, we can’t stop people from making bad decisions. But when they do make them, we should allow them to feel the consequences. I don’t find that mean, I find it real. I also find it to be a good teacher for the future, both for them and others.
You know, people have had their homes closed foreclosed before this. Pick any day in any month on any year under any President. It’s never pretty. It sucks. It’s devastating. That is precisely why one should be so cautious. If you’re not, bad things happent. Why the left constantly seeks to absolve people of personal responsibility is baffling.
Thank Heaven for hard-headed realists, who drain the joy from life and stuff the hole with styrofoam peanuts. We are blessed, that they stay our hands from foolish generosity. Blessed St. Ayn of Rand, sneer at them in their hour of need, verily it is more than they deserve…
Yes, as a rule, I think we should not advocate “foolish generosity”. Which is precisely what rewarding bad behavior would be.
But I’ve got great news for you and yours! You are free to exercise your generosity and send a check to any person who might have his home foreclosed. I’m sure with a minor amount of sleuthing you can find someone right in your home town.
Urgh. I’ve been avoiding even reading these threads because of the inevitable back-and-forth that happens so much and ends up losing the point. But I guess here is as good as any to propose a solution because I’ve been asking myself for the last few days, “Why don’t they…”. I really figured someone else would come up with it in these endless debates, but I’m not getting the search function to work and I’ve sifted through all I can take. So here’s my proposal, and please tell what I’m missing that it wouldn’t work:
Re-write the currently foreclosing and in-default loans as 30-year fixed loans at the going Prime Mortgage rate. It’s what, 5.5% right now? Hasn’t it been lowered specifically to make conventional loans more affordable? Maybe they need to re-qualify the defaulters with the lower rate. if they still don’t qualify, make it work anyway and make it work so they’re making the same payment they were, which was something they had been able to afford - right? If they can’t afford what they had already been paying, well, then that’s their problem and they should be in default/foreclosure.
The criteria for the re-write would be that the loan’s original qualifying would have to have originated between years such-and-so, and be ARM’s that came up for the balloon between years so-and-such. (since those are the ones causing all the problems), and belong to the financial institutions in question.
The reason people are in default/foreclosure is because they couldn’t afford to refinance the loan at the higher 30-year-fixed rate - which is what you do when the balloon comes up and you don’t sell. People couldn’t sell because the market was starting to go soft, so they were stuck. Are stuck. Hence the gamble Magellan keeps bringing up.
What am I missing here? The banks win because they keep getting payments, and take a hit because they’re not getting the balloon payments they were counting on, and in some cases a loss on interest. The homeowners get a spanking because they’re still paying on a house that’s not worth the loan - but at least they still have a place to live and can make the payments, and anyone who buys a home takes that gamble.
Investigating institutions for predatory lending practices should be taking place, and appropriate trials and punishments should ensue. The truth of the matter is that these kinds of lending practices have been around for decades.
Why it’s a big deal now is that it’s putting families out into the street, living out of the car they’re leasing because the payments for the first two years were lower than if they took out a 6-year loan. Little do they know that when the two years are up, they’ll still have to make a huge payoff payment, make a 6-year loan after all, or sell the car. Sound familiar?
As much as a few people want to crow about how smart they are, the reality is that a lot of John Q Public is just not that smart. These folks defer to the “expert”, i.e. the Loan Officer, who says he/she can get them a house. These home buyers are not “readers” they are not “researchers” and they trust the loan officers to do right by them.
I work with a lot of low- to middle-income people. The reality is they really depend on professional white-collar types to do the right thing. In my experience with many folks in the lower-income brackets, trying to explain the math behind how a loan works is, honestly, a waste of time. I’ve been in the mortgage business (it was in the early-mid-90’s) and I’ve seen plenty of people who can afford a mortgage and have steady jobs, but who would never be able to grasp the ideas of how interest payments and interest rates work. Ethically, I would never offer an ARM loan to folks like these. I would have qualified them for a 30-year or nothing. They would happily live out the mortgage, oblivious to its inner workings.
If they didn’t qualify under a loan I thought they could handle, they would have gone to a lender who would qualify them under different terms. It’s unethical, it’s bad practice, but not, unfortunately, illegal. As long as it gets past the underwriters, it’s a done deal. 3 to 5 to 10 years later, here we are.
As much as I wish everyone were as smart as me, they just aren’t. It’s not their fault, and I can’t fault them for wanting to own a home. I CAN fault the assholes who “made it work” for them, regardless of the long-run consequences.
I just want to throw this out there to include it in the debate: the Republican plan. They’ve mentioned that the government should sell insurance to these banks for purposes of guarding against failure of the mortgage backed securities. My quick take: Hasn’t this already been tried? Isn’t that precisely what credit default swaps are - only not government backed?
That would sound good but the bailout is for banks not the home buyers. How it filters down, if it does remains to be seen. Paulson wants the power to give any financial institution any amount he seems to think fit. He is not giving it to the homeowner.
First, thanks for the thoughtful post.
But isn’t it safe to say that some of those assholes got people into homes with ARMs, balloons, etc. They didn’t all default, did they? Those who took the time to understand what was expected of them and were realistic are now homeowners thanks to the mortgage lenders. I don’t mean to imply that there were unsrcupulous people out there, or even outright criminals, but there were also people trying to do right by the homeowners. Like yourself.
One of the two problems I have with what you wrote is that you seem to want to prevent people from making mistakes. That’s both good and bad. The good is obvious. The bad is that it strips people of having power over their own destiny. People have to be able to make mistakes. Let them each evaluate the risk for their own circumstances. I think i recall reading in this thread or elsewhere that the default rate was about 9%. I wonder what percent of those were in the sub-prime market. The point is that while the relaxed rules created a situation where many people are getting hurt, it appears to also have created a situation where people who ordinarily wouldn’t have been able to buy a home are now homeowners. And no, I’m not arguing for an unregulated market. I think some regulation is a very good thing.
The other problem I have is really the crux of the issue. You say “it’s not their fault”. Not only is that incorrect and divorced from reality, it is the least helpful message to send. People should understand that buying a home is a really, really big decision. That they need to be VERY careful. That they need to act prudently. That it REQUIRES one educate themselves to a degree. If more people had that attitude, we wouldn’t be where we are. We should demand MORE personal responsibility from people, not seek to excuse away their bad decisions.
I don’t mean to waive off the rest of the post as I feel the same way you do, too, but I feel that this bailout go where it will be the most efficient.
I’ve been concentrating mainly on what caused all this to happen in the first place. However, what I’ve been reading is that the economy still needs more liquidity. There also appears to be a crisis of confidence, and I’m not really sure what will appease that. But, if the issue is actually liquidity, then I don’t think the above solution will work or will be as effective as ensuring that the securities based off these mortgages are guaranteed (i.e. giving money to the banks):
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These people didn’t qualify for the 30 year fixed in the first place. For whatever their reason they were subprime. They need to pay the higher interest rate so that securities that are derived from these loans accurately reflect the risk involved. (Underwriting needs to be tighter, too).
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Home Prices. People who took out the interest only ARMs did so thinking they can refinance their way out of the value growth of their house or sell (cf. I have a friend in LA who is on a 10 year interest only ARM because it was cheaper than paying rent, so that’s what he looks at it as, even though he qualifies for a 30 year fixed). Giving them artificial ability to make payments does not increase the value of homes, not like having other people being able to afford the homes, too. Plus, there might be an oversupply of homes on the market now. The stock of houses needs to clear in order for supply and demand to reach equilibrium and a real price can be set.
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Liquidity – banks need the cash now so that they can continue with their loans and other banking operations. Like I said before, I think this is the real issue. People/companies with good credit need to get loans so they can move the economy along. After the end of every bubble, people seem to think that it was the bubble that was responsible for moving the economy. Way more often than not, that is not the case. Bubbles represent something above what the economy is normally doing. If the people in the above solution are only making monthly payments, and these people are risky to begin with, they might not be able to inject enough liquidity which the banks need right now.
I’m not saying that the proposed plan is any better, mainly because the above solution was more accessible and the government hasn’t agreed on one yet. I prefer sticking to classical, tried economic principles. I also believe the price mechanism must remain real and true. And, lastly if we can swing it, we need to crush inflation.
With a few tweaks, the above solution might work out, as long as liquidity and price issues are addressed properly.
I would think many of them qualified for a fixed mortgage. The companies made more selling them a variable. When I refied I had to battle these guys who insisted over and over that if I took a variable all would be fine. I got them to understand what I wanted and email the terms. They would email variable terms. I had 4 different companies ,I was dealing with. I used them to compete with each other. Everyone tried several times to push a variable rate. They were insistent that it was better for me. I was on the phone making it perfectly clear where I wanted to go. They would still try . They would agree on the phone and ,even when they gave a fixed contract they would show a variable to show how low the monthly payments would be for the first 3 years. It was a battle. I suppose they wore down a few people.