Should Bush bail out mortage holders?

Great Debates
1

This article says that Bush is going to outline a plan to help mortgage holders, maybe later today.

My question is WTF? Can I please turn the clock back and but those homes I was looking at but decided not to because I thought I might be getting in over my head? Can I go back and go buy more house than I could really afford with that nice big balloon payment attached at some mythical, never-to-come date in the future? Can I get in my time machine and sign those papers so that I would have enjoyed the large increase in equity I would have realized here in San Francisco where everything has continued to go up, up, up? Oh, and how about those people (I personally know of two) who decided to sell their homes after a couple of years so they didn’t fall further behind? Can they come with me in the time machine and decide to hang in there until saved by Daddy Bush?

I would have put this in the Pit but I’d like to see what has particular proposals are before the bitch-slapping. But I do think that Bush does a disservice to everyone when he sends the message that the government will bail you out of your unwise decisions.

The cost of such imprudence and risky behavior should be real. If a bunch of homes are then foreclosed on and hit the market and bring it down some making the buying of a home more affordable for the responsible, that is as it should be. This seems like a really bad—and unfair—idea to me?

Thoughts?

2

I agree. All I’ve been hearing for the past six months is that the bubble in home prices is bursting, and how terrible that is. Not for me; I’m looking to buy a home.

I’m not holding my breath waiting for someone to report on this side of the issue.

3

I think it’s completely absurd, and I even have a friend that’s caught in a terrible crunch due to the situation. I can’t even get health insurance, but we’re going to bail out a bunch of people who made irresponsible financial decisions!? Why doesn’t he write off my fucking student loans first?

4

My guess is that his real reason isn’t to help out mortgage holders, but to help out mortgage lenders who are facing disastrous numbers of defaults otherwise.

5

[QUOTE=An Arky]
My guess is that his real reason isn’t to help out mortgage holders, but to help out mortgage lenders who are facing disastrous numbers of defaults otherwise.
[/QUOTE]

But wouldn’t letting nature take its course go a long way to discourage predatory lending, another thing he wants to fix?

6

I’ve been wondering if someone was going to offer subprime borrowers those “100 year” mortgages, like the Japanese have.

As to “should he”, well I doubt it has anything to do with sound economics and everything to do with buying votes.

7

It’ll be the savings-and-loan crisis all over again: Financial execs fuck up, the government bails them out.

8

[QUOTE=An Arky]
My guess is that his real reason isn’t to help out mortgage holders, but to help out mortgage lenders who are facing disastrous numbers of defaults otherwise.
[/QUOTE]

Mortgage holders and mortgage lenders are the same thing (unless the party who made the original mortgage-secured loan sells the mortgage to a third party).

9

I heard on NPR yesterday that the burst bubble is affecting the auto industry. People are not buying cars because of worries caused by the mortgage situation. A GM plant in Canada is laying off people because people are not buying their vehicles, and they’re citing the US lending troubles. Worried people tend not to buy things, so fewer things need to be made, so people may be laid off. Looking at the whole economy, it might be better to bail people out.

When I bought my house prices had not yet gone crazy. I had a choice of getting a 5.375% fixed rate (a little higher than I could have gotten, but at the time it was a ‘second home’), or choosing a lower variable rate. This is how I made my decision: Interest rates are at historical lows, therefore they’re likely to go up. I have no way of knowing how high interest rates will go, so I have no idea what my future payments will be. Thus it’s better to pay a few bucks more in the beginning, since I’m betting interest rates will go way higher and I’d be paying a lot more later if I choose a variable rate. Fixed rate it is. And I also chose a house that I could (at the time) pay off immediately if I had to.

AIUI, other people thought this way: I’ll get the low variable rate now. When rates go up I’ll already have built equity, so I can refinance at the higher rate but still be making the same or lower monthly payments. Or: If it gets too expensive I’ll just sell the house, make a huge profit, and buy another house when the market turns down. Or: I’ll buy this expensive house and flip it.

Of course ‘buy low, sell high’ only work if people are still paying enormous prices for houses. In the last case it’s just plain ‘playing the system’ and people deserve to win or lose just as much as if they had been playing the stock market or a slot machine or the lottery. They made a bet and they lost. In the prior case I don’t see it so much as a get-rich-quick scheme as rampant consumerism. That is, people buy a big house because it’s The American Dream and the Joneses have a big house, so why not me? I have a little more sympathy for them, but still think that they were suckers. Sorry, Roger. You tiger now.

But what about the first case? Many, if not most, of these people have jobs. Many of them have good credit. They’re not in it for the quick buck, and with a job and good credit they reasonably expected to be able to refinance. Unfortunately lending standards have become tighter, and they’re unable to refinance. These people made poor decisions based on reasonable assumptions that turned out not to have held up. Should they be ‘bailed out’?

Not as such. They shouldn’t be ‘bailed out’, but I think they (the first group – not the other two) should be ‘helped out’. It’s true that they (probably) knew that interest rates would rise. But I think it’s likely that they did not think that with their good credit and employment that refinancing would not be available to them. I don’t know what the President said, but from what I’ve heard on NPR I’d be worried that the mortgage crisis would spread through the rest of the economy if too many people lose their houses. I’m not an economist, but I think there might be a plan whereby the federal government could help people refinance in such a way that their mortgage payments are not much higher (and certainly not lower) than what they’ve been paying. I think it would be better for the country and the economy if otherwise concientious people do not lose their homes.

I think that much of the problem arises from the predatory lending practices of the lenders. I think a lot of people were suckered. Now, one might argue extremes and say that these people deserve to lose everything just as much as if they had fallen for a Nigerian scam. Scams require greed to work. But Nigerian scams don’t tend to disrupt the whole economy. It’s a balancing act. We can’t just bail people out; but on the other hand allowing them to fail will hurt people who had nothing to do with buying a house.

The speculators can lose. The people whose plan included ‘winning the lottery’ (i.e., holding onto their houses if possible, but selling for a profit or at least breaking even if they couldn’t make the payments) deserve a little sympathy. But the people who planned on keeping their houses, not selling them to get out from under the loan but refinancing based on their good credit and employment status should have some recourse.

IMO the real villains are the lending companies. IIRC the Great Depression featured people who could not get credit to, say, buy a new piece of farm equipment or to buy seed or to tide tide them over through the drought. Without these resources they could not make their mortgage payments and the banks foreclosed. More foreclosures depressed property prices, so people who might have gotten a loan no longer had the assets to qualify. (There were other factors of course, notably people buying stocks on margin, but I think most people who lost their homes were not playing the stock market.) Banking and lending became more regulated after the Depression, and a ‘safety net’ of insurance was put into place. We’re not in a depression and I don’t think the current troubles are likely to result in one because of the mechanisms that are in place. But I think that we need to do something to resolve the situation and to put mechanisms (regulations) in place that would help prevent this from happening in the future.

10

[QUOTE=BrainGlutton]
Mortgage holders and mortgage lenders are the same thing (unless the party who made the original mortgage-secured loan sells the mortgage to a third party).
[/QUOTE]

This confusion is probably my fault. You are, of course, correct, but I was using the term to refer to the people who bought the homes. For the record, I don’t think either group should be bailed out.

11

I think how offended I’ll be will depend on the details of the ‘help’. Does the house have to be the primary residence, so that flippers don’t benefit? Is it forcing or encouraging reasonable loans in place of predatory ones? Does it include legislation to prevent future predatory lending?

I’m currently living in a house bought with an FHA loan, which is a federal encouragement. So I’m obviously good with the idea of some level of federal encouragement. I’ll wait and see what the details are.

12

First, Johnny L.A. I like to thank you for your thoughtful post. Though I disagree with much of it, as you will soon see.

[QUOTE=Johnny L.A.]
Looking at the whole economy, it might be better to bail people out.
[/QUOTE]

Which would encourage the same type of behavior down the road, wouldn’t it? Which would require more bailing people out, etc., etc.

[QUOTE=Johnny L.A.]
When I bought my house prices had not yet gone crazy. I had a choice of getting a 5.375% fixed rate (a little higher than I could have gotten, but at the time it was a ‘second home’), or choosing a lower variable rate. This is how I made my decision: Interest rates are at historical lows, therefore they’re likely to go up. I have no way of knowing how high interest rates will go, so I have no idea what my future payments will be. Thus it’s better to pay a few bucks more in the beginning, since I’m betting interest rates will go way higher and I’d be paying a lot more later if I choose a variable rate. Fixed rate it is. And I also chose a house that I could (at the time) pay off immediately if I had to.
[/QUOTE]

And this is precisely the type of attiude we should be trying to promote. Now most people won’t have the funds to simply pay off the entire loan, but that aside, everything else shows the type of thinking that we should encourage. Any bail-out will do the opposite.

[QUOTE=Johnny L.A.]
…I don’t see it so much as a get-rich-quick scheme as rampant consumerism. That is, people buy a big house because it’s The American Dream and the Joneses have a big house, so why not me? I have a little more sympathy for them, but still think that they were suckers. Sorry, Roger. You tiger now.
[/QUOTE]

God, I love that line. But these people have made a completely dumb decision. Why should others then be expected to pay for it?

[QUOTE=Johnny L.A.]
But what about the first case? Many, if not most, of these people have jobs. Many of them have good credit. They’re not in it for the quick buck, and with a job and good credit they reasonably expected to be able to refinance. Unfortunately lending standards have become tighter, and they’re unable to refinance. These people made poor decisions based on reasonable assumptions that turned out not to have held up. Should they be ‘bailed out’?
[/QUOTE]

No. The thinking that goes into making bad decisions should not be rewarded by eliminating or lessing the cost of those bad decisions. If so, then they’re not so bad, are they?

[QUOTE=Johnny L.A.]
I’m not an economist, but I think there might be a plan whereby the federal government could help people refinance in such a way that their mortgage payments are not much higher (and certainly not lower) than what they’ve been paying. I think it would be better for the country and the economy if otherwise concientious people do not lose their homes.
[/QUOTE]

Damn it, my time machine’s not working. Can I borrow yours? If those people lose their homes en masse, won’t the price of homes drop? Won’t that make it possible for people to buy homes that previoulsy couldn’t? Isn’t that good for the economy, the country?

[QUOTE=Johnny L.A.]
I think that much of the problem arises from the predatory lending practices of the lenders. I think a lot of people were suckered.
[/QUOTE]

Most weren’t “suckered” by anything other than their own imprudence, greed, or stupidity.

[QUOTE=Johnny L.A.]
The people whose plan included ‘winning the lottery’ (i.e., holding onto their houses if possible, but selling for a profit or at least breaking even if they couldn’t make the payments) deserve a little sympathy. But the people who planned on keeping their houses, not selling them to get out from under the loan but refinancing based on their good credit and employment status should have some recourse.
[/QUOTE]

So, how about that time machine? (Aside: should the word I underlined be there? It seems to make the opposite point than the one I think you are trying to make.)

[QUOTE=Johnny L.A.]
IMO the real villains are the lending companies. IIRC the Great Depression featured people who could not get credit to, say, buy a new piece of farm equipment or to buy seed or to tide tide them over through the drought. Without these resources they could not make their mortgage payments and the banks foreclosed. More foreclosures depressed property prices, so people who might have gotten a loan no longer had the assets to qualify. (There were other factors of course, notably people buying stocks on margin, but I think most people who lost their homes were not playing the stock market.) Banking and lending became more regulated after the Depression, and a ‘safety net’ of insurance was put into place. We’re not in a depression and I don’t think the current troubles are likely to result in one because of the mechanisms that are in place. But I think that we need to do something to resolve the situation and to put mechanisms (regulations) in place that would help prevent this from happening in the future.
[/QUOTE]

The difference is that you needed farm equipment or seed. No one needed to buy a house—or a bigger house. While actual predatory lending needs to be addressed, the real villain here, as I said before, is people’s own imprudence, greed, and stupidity.

13

I bought a gas hog back when gas was cheap(er). Do I get a bail out? Sheeeesh.

14

[QUOTE=Yllaria]
Is it forcing or encouraging reasonable loans in place of predatory ones? Does it include legislation to prevent future predatory lending?
[/QUOTE]

This is what I was thinking of. People should have the opportunity to refinance instead of becoming a link in a chain that leads to larger economic losses for the country. But where is the line drawn? As I said, IANA economist. If someone got a 2% loan and they’re now paying 10%, and the government says, ‘Okay that’s five times what you started with. We’ll lower your rate to a fixed 5%.’ then I’m still paying more for my fixed-rate loan than they will for their new government-limited loan. And there are people who got into loans with very little margin for higher rates. Maybe they got a low rate, but absolutely can’t pay more than 5% and the government sets a limit of 6%. They’ll still lose their houses. But I think the Fed should set a ‘reasonable’ interest rate to assist otherwise responsible people. What’s ‘reasonable’ and ‘otherwise responsible’? That’s for an economist to decide; not me. As it is, I don’t even know what the interest rate is now.

I think there should be legislation, but what? A requirement that all contracts include a maximum interest rate for the loan? Penalties for lenders who loan money to obviously unqualified borrowers? What makes it ‘obvious’?

It seems to me that lenders are making an investment. They loan money and expect a certain return. My lender agreed to accept a 5.375% return on his investment for 30 years, or not as long if I pay early. Other lenders agreed to accept rates that would earn them less money for a certain period with the stipulation that they would make more money later. But there comes a point when a reasonable return becomes a windfall. The way I see it a lot of people made very poor decisions. But the ones who really expected to make money were the lenders. They made poor decisions, and I’ll guess they were prompted by corporate greed. Lenders and borrowers are partners. When one partner takes advantage of the other, the partnership breaks down. Lenders are entitled to their profits, but not to such an extent that they kill the goose. Lenders could have invested in bonds, but they chose to invest in people making mortgage payments. They should accept a lower return on their investments than they could be making today, but should not have to accept less than they originally bargained for.

But what about sub-prime loans? It costs lenders to borrow the money that they loan to people. Non-expert opinion: Lenders who loaned money below the existing prime rate at the time of the contract should be able to raise the rate to the then-existing prime rate plus a reasonable profit. Their return would be lower than what they would get if the borrower paid the current rate, but at least they’d be getting a return on their investment. Some borrowers would not be able to pay the ‘reasonable’ rate and lose their houses anyway; but I think that there would be fewer defaults than there are in the current situation.

There needs to be some flexibility on the parts of both the lenders and borrowers.

15

[QUOTE=Johnny L.A.]
But what about the first case? Many, if not most, of these people have jobs. Many of them have good credit. They’re not in it for the quick buck, and with a job and good credit they reasonably expected to be able to refinance. Unfortunately lending standards have become tighter, and they’re unable to refinance.
[/QUOTE]
I’ve been hearing something similar; that lending standards have tightened to the point that even people who have the ability to pay will have a hard time getting approved. But why? The mortgage industry has suffered some losses, but it’s still in business. The made mistakes by lending money to people who weren’t able to pay it back, and they should want to fix that. But why must that lead to them making the opposite mistake now?

16

I think I may have covered some of these in my last post. Maybe not.

[QUOTE=magellan01]
Though I disagree with much of it, as you will soon see.
[/quote]

And of course your points are valid. (Not that you need me to tell you that.)

[QUOTE=magellan01]
Which would encourage the same type of behavior down the road, wouldn’t it? Which would require more bailing people out, etc., etc.
[/quote]

I’m not talking about bailing people out. I’m talking about helping many (not all) people to keep their homes, while at the same time not destroying the lenders. As I mentioned in my last post, mortgages would cost the borrowers more than they started with and lenders would not make as much as they do now. I think this would be better for the US economy than allowing borrowerrs and lenders to go bankrupt. If it’s done right and fairly, I think that the beaviour would be attenuated in the future.

[QUOTE=magellan01]
God, I love that line. But these people have made a completely dumb decision. Why should others then be expected to pay for it?
[/quote]

The way I’m looking at it then the people paying for it would be the lenders, not The People. The lenders would pay for it by not making as much as they could, but they’d be making more than they were getting when they made the loans.

[QUOTE=magellan01]
No. The thinking that goes into making bad decisions should not be rewarded by eliminating or lessing the cost of those bad decisions. If so, then they’re not so bad, are they?
[/quote]

Unfortunately even otherwise intelligent people can fall for a line of bovid excrement. Lenders know the ins and outs of money, and some of them intentionally misled people. I think borrowers put a lot of trust in the ‘experts’, and the ‘experts’ are the ones who are planning to make a killing off of them.

[QUOTE=magellan01]

Damn it, my time machine’s not working. Can I borrow yours? If those people lose their homes en masse, won’t the price of homes drop? Won’t that make it possible for people to buy homes that previoulsy couldn’t? Isn’t that good for the economy, the country?
[/quote]

If people lose their homes, then home prices will drop. But the supply of available funds would also be less. As I said, according to NPR, people who should be able to get loans are not getting them. If people cannot get credit, they’re probably less likely to try to buy a house, a car, a new washing machine, etc.

[QUOTE=magellan01]
Most weren’t “suckered” by anything other than their own imprudence, greed, or stupidity.
[/quote]

Stupidity and greed on the parts of the borrowers certainly played a part. But again, the lenders knew exactly what they were doing. They do it every day. People may buy a house once in a lifetime, and it’s a fairly complex process that requires a certain amount of trust.

[QUOTE=magellan01]
So, how about that time machine? (Aside: should the word I underlined be there? It seems to make the opposite point than the one I think you are trying to make.)
[/quote]

Those people would still be paying more. Some of them will lose their homes. But they wouldn’t be paying unreasonable amounts.

[QUOTE=magellan01]
The difference is that you needed farm equipment or seed. No one needed to buy a house—or a bigger house. While actual predatory lending needs to be addressed, the real villain here, as I said before, is people’s own imprudence, greed, and stupidity.
[/QUOTE]

‘Need’, as has been pointed out in many SUV threads, is subjective. Does a farmer need a new tractor? Won’t the old one work? A new tractor should increase his profits, but hi might be able to make a living using the old one. Do people ‘need’ to buy a house? Have you checked rents lately? I locked into a fixed-rate loan, so it’s cheaper for me to own a house than to rent an apartment. Yes, people are imprudent, greedy and stupid. But the lenders are imprudent, greedy and smart. Too smart by half, it seems now. It takes two to tango.

All I’m really trying to say is that there should be a solution that A) allows most people to keep their houses by paying a higher interest rate than they planned on, but one that is not so high that they lose their homes; B) allows lenders a positive return on their investments, albeit lower than the current rate of return; and C) does not cause severe repercussions throughout the rest of the economy.

17

[QUOTE=Johnny L.A.]
I’m not an economist, but I think there might be a plan whereby the federal government could help people refinance in such a way that their mortgage payments are not much higher (and certainly not lower) than what they’ve been paying. I think it would be better for the country and the economy if otherwise concientious people do not lose their homes.
[/QUOTE]
The problem is that actually conscientious people, the ones who decided not to buy houses that they couldn’t afford, end up paying for the mistakes of people who took bigger risks. This potential bailout will be yet another case of privatizing profit and socializing risk. Each time that happens, it provides another incentive to buy into future bubbles and pie-in-the-sky “new economy” theories. If you get lucky, you win big. If you get unlucky, Uncle Sam comes in and keeps you from losing big.

It may be worth a slightly larger economic downturn this time if it leads to an understanding that the rules won’t be bent in the future.

18

[QUOTE=iamthewalrus(:3=]
The problem is that actually conscientious people, the ones who decided not to buy houses that they couldn’t afford, end up paying for the mistakes of people who took bigger risks.
[/QUOTE]

How do they end up paying? (Not being argumentative; I just want to know.)

19

[QUOTE=Robot Arm]
I’ve been hearing something similar; that lending standards have tightened to the point that even people who have the ability to pay will have a hard time getting approved. But why? The mortgage industry has suffered some losses, but it’s still in business. The made mistakes by lending money to people who weren’t able to pay it back, and they should want to fix that. But why must that lead to them making the opposite mistake now?
[/QUOTE]

Because in many cases, they literally have no money to lend right now. Or very little. They depend on collecting mortgage payments from current customers in order to continue lending. When there is a massive rise on foreclosures due to nonpayment, it results in a cash shortage, which means they have to be incredibly careful with what money they do lend.

20

[QUOTE=Johnny L.A.]
How do they end up paying? (Not being argumentative; I just want to know.)
[/QUOTE]
By keeping the market higher than it would otherwise be, everyone’s housing costs go up. And if there is any sort of government bailout, that money comes from our taxes.