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.
