That’s presuming that the government does nothing else as a result of the housing crisis. They could lay in new regulations, seek to prosecute the bank heads for X, and/or tell the banks to pay the difference themselves.
It’s also worth noting that $39 billion, taxed over a couple of decades, across the population of the nation and its business, amounts to a few cents per individual, per year. It’s not worth crying over.
The fact that the value of the house is currently less than the mortgage has no bearing on the homeowner’s ability to repay it.
I don’t really know but it sure sounds better to forgive some actual homeowners mortgages than it does to just throw money at the banks AND let them foreclose.
Eh, I’m going to respond before reading the thread. Sorry about that. I’ll just make it short so I won’t waste too much time.
The two big problems with bailing out the homeowners vs. bailing out the banks are:
Simplicity. What’s easier - bailing out 10-odd banks or a vague number of homeowners (which will reach in the 10s of millions)? How are you going to identify which homeowner needs a bailout - have them fill out a form? What is the mechanism for identifying the correct homeowners, getting their information, telling the bank that homeowner A is fully bailed out/homeowner B is partially bailed out/homeowner C doesn’t get squat?
Timeliness. The markets are crashing now. We need to act now. We can’t wait for a new process to be developed, set up, funded, and run - the steps needed to bail out the homeowners would have taken far too long and the political uncertainty far too high for a homeowners bailout to be an effective measure in September-October 2008.
If such a mechanism were already set up then it may have been possible. But there’s no way such a bailout could have been implemented any sooner than, say, 6 months and it would have been a disaster.
[QUOTE=Kearsen]
I don’t really know but it sure sounds better to forgive some actual homeowners mortgages than it does to just throw money at the banks AND let them foreclose.
[/QUOTE]
Considering we are getting most of the money back AND that we didn’t have a financial meltdown or have to go back to the joys of hunting and gathering, I’m curious why the alternative sounds better to you. I’m puzzled how this would work if we just forgave homeowner mortgages (but only some of them…presumably just the folks who deserved it, or something), or if we made mortgage loans that were underwater magically above water…or whatever you guys are proposing here…how that would work in the real world. And how this would have averted the crisis (this is leaving aside the fact that it’s all fantasy, that there was no way in hell you could have gotten the votes to make this happen in anything like a timely manner, or heck happen at all in the political situation that existed then).
-XT
THIS. The idea is a good one, why should we bail out the banks when they shiat on the consumer? The dollars are American Taxpayer’s money and would have been better off used to help the Taxpayer. But here lies the problem. Who do you help? Do you help only those facing forclosure or include someone who is only one payment behind? How about the middle class family making their payments but barely, sacrificing in every other way? Do we forget them? Or how about the “rich”? Is it fair that they should get nothing yet continue to pay taxes?
Great idea, but no practical way to implement it.
Not trying to hijack the thread but I had a similiar idea when it came to the Auto bailout. Why did we just give money to the automakers? Wouldn’t it have made more sense to give everyone something like a 10k or 20k “credit” towards a new American automobile? That way the taxpayer would get something, a new car. The dealers would get something, commissions from sales. The finance people would get something, business to finance the over amount of the car. And lastly the manufacturers would sell cars and make money. If the majority of the American public decided not to purchase say GM cars and they went out of business, well then the market has spoken. I always thought that if we are going to us US Taxpayer monies then the US Taxpayer should have gotten something out of it. Seems also, that doing my idea would have stimulated the economy instead of just saving a few corporations.
And lastly, we should have let the banks fail. This bailout isn’t going to save them in the long run. Mis-managed is a self correcting behavior for a company. If they are too stupid to stay in business, then let them fail. There will be others to take their place.
But we’re addressing the people who are having trouble paying, who you advised to go find a cheaper place to live. Which is good advise in normal times.
There is also the issue that a person paying on a house worth $Y with current value $X << $Y has a financial incentive to dump the current house and buy an equal house for less money if there were no disincentives to do so - which of course there are. But that is not the issue you were addressing.
1- That is what Cash for Clunkers was (minus the US-made requirement)
2- Deposit banks can’t be allowed to actually fail. In the case of WaMu, when on the brink of failure, they were sold for peanuts to JP Morgan.
An actual TBTF large bank closing would create nationwide panic in markets and the streets.
So banks just change ownership over a weekend.
Could those of you who are advocating that government pay off mortgages in some way please explain it in some detail, and why it makes sense? You are forcing me to agree with magellan01 here.
If I lend money to a deadbeat friend, he’s at fault for being a deadbeat and I’m at fault for lending it to him, but there is no reason for me to ask you to pay some of my losses.
We’d probably want there to be enough fees and hassle to prevent someone who is $50 underwater from applying - make it 10% or something.
As mentioned, Cash for Clunkers did some of this, cleared out their inventory, and set the stage for the resurgence of Detroit. The government bailout was once more a loan, though a risky one, not a gift. I’m not sure we got all our money back from GM yet, but we will. Though this wasn’t anticipated, of course, the bailout put the US automakers in good position to pick up market share first when Toyota screwed up and second when the earthquake hit and the Japanese supply chain was disrupted.
Go back and remind yourself of what happened when they let Shearson fail. Is a depression really worth the ability to gloat?
The house value backing these mortgages is already gone. The banks appear to want to shame homeowners into doing something that is not in their financial self interest, and what we are getting is the slow drip drip drip of short sales and foreclosures. This leads to all sorts of financial issues - money paid to the banks for house cost above present value is not going into consumption, people with underwater mortgages are less likely to be able to move to better jobs, and of course the abandonment problem.
The decline in value must be significant, and the borrower must be able to afford the new mortgage, or you are expending effort and not stopping an inevitable foreclosure. And, as I said, the banks should some, or perhaps a lot of, any upside benefit as prices firm up.
[QUOTE=Voyager]
The house value backing these mortgages is already gone.
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Some of the value is gone (in some cases), but it sounds to me as if there are folks in this thread who just want to wave it all away…which, to my uneducated mind means further destroying the wealth represented by those loans. That would be fine in some cases, but we are talking about literally trillions in wealth just being waved away. Again, perhaps I’m missing something here…this is not my area of expertise.
I would say that the banks want to have people honor the commitments they signed on the dotted line for, and that in a lot of cases the banks are getting screwed as people just walk away from their loans (and in some cases walk away from the loans but continue to occupy the houses until months or even a year has gone by).
The banks are going to, perhaps, make out in the long run, as in at least some of the cases the value of the houses people are walking away from will recover, but in the mean time they have to suck it up.
-XT
A few posts up I asked these people to explain themselves, because it sounds like some of them want the government to pay off the mortgages, which makes no sense at all, and will result in the government owning everything.
In Soviet Union, houses own you!
I’d feel a lot more sympathetic to the banks moral plight if this wasn’t standard business procedure. Companies declare bankruptcy and renegotiate or walk away from contracts all the time (AMR just recently) without this level of moral outrage. Perhaps it would go down better if the head of the household voted himself a $100K bonus for walking.
Another problem is all the HELOCs attached to first mortgages. In many cases the secondary loan bought autos or paid off credit cards.
So a new appraisal would be in order for each refinancing. In fact, I would think that all old appraisals are pretty much worthless in 2012.
This is all above my pay grade, but I think the issue is not so much that a homeowner is underwater on his mortgage, but whether or not he can pay. I know tons of people whose homes lost value, being worth less than they paid for them, but they still had jobs and could make mortgage payments. They couldn’t sell their homes, or they’d have to write a huge check to the bank, but generally that wasn’t a problem.
Sure, there were lots of people in that position who couldn’t keep paying the mortgage and many had balloon payments looming in the near future.
But underwater mortgage, per se, was not necessarily a problem for the random homeowner in the way it is a problem for the banks holding the mortgages (many of which were worthless).
[QUOTE=Voyager]
I’d feel a lot more sympathetic to the banks moral plight if this wasn’t standard business procedure. Companies declare bankruptcy and renegotiate or walk away from contracts all the time (AMR just recently) without this level of moral outrage. Perhaps it would go down better if the head of the household voted himself a $100K bonus for walking.
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I don’t actually feel ANY sympathy for the banks plight, moral or otherwise. They made stupid decisions and will pay the price for them…or not, as things work out. I was just pointing out that the banks don’t want to shame people, they simply want them to honor their commitments. I have no problem with people either singly or collectively renegotiating the terms of their loans. I just don’t want the government to attempt to wave a magic wand and make it all better…or make large amounts of wealth disappear.
-XT
I saw something a while back tracing that “true blue Americans don’t walk out on their debt” stuff back to the Mortgage Bankers Association or whatever. You know, the guys who were walking out of a building in NY.
The point is that the wealth has already disappeared. The question is what is the best way of dealing with it. The mortgage companies took a lot of borrowers for suckers already - now they are trying to do it again. You might say there is a moral hazard for helping people who had 0% down and stuff. But lots of people underwater’s only sin was buying near the top of the market. Since the market wouldn’t have crashed nearly so badly if the banks controlled their lending, we need government help in getting the banks to renegotiate, since doing it one at a time hasn’t been working very well. I hear radio ads all the time about companies offering to help you renegotiate. Let’s say I’m skeptical.
I have three questions:
Bailouts for banks were structured mostly as loans or buyouts, and much of the Treasury investment has already been recovered. But are these homeowner grants intended as unrecoverable payouts?
But, if we’re looking for a simple way to provide relief, allowing such walkaways (even if they were otherwise prohibited by contact or law?) might be it. Of course an individual homeowner might be able to use the threat of walkaway to get his mortgage renegotiated. This would certainly not solve all problems, relieving only “underwater” homeowners. But it would tend to point right at the sharper mortgages from both sides (fraudulent loans, deceived buyers). Yes, if this were the only relief program it would be “unfair”, but it might be a good first step (especially as an example to answer charges here that relief is “too complicated to be doable”).
Please note that no government intervention is needed (beyond decreeing the legality of such walkaways), and paperwork is trivial: Homeowner writes a letter (“Walking away. Nice to have known you.”); Bank can counteroffer (rental terms or reduced principle).
I’m sure there are flaws in this plan, but please don’t make trivial observations about “moral hazard.” Yes, the plan might call into question the solvency of America’s banks, but I’ve already insisted that increasing banks’ capital is a good step.
The idea elsewhere in the first world - where social security is more developed - is that it’s cheaper to keep a family in situ, by paying the INTEREST ONLY on the loan, than it is to re-house the entire family, especially given the impact that has on social housing provision, the children’s schooling, etc.
Once these families are out of the home-owning market, there is much less likelihood of them being eligible again.
On bailing out banks, negating all shareholder risk in the ownership of those shares isn’t exactly equitable either.
Nope, a depression would be terrible. However bailing them out isn’t solving the problem. Something tells me that my children will be dealing with a similar problem in 20 or 30 years. The banks know we won’t let them fail, so they will continue to take unnecessary risks with the knowledge if they screw up too bad the taxpayer will bail them out. Perhaps a bailout was the correct option. But perhaps we should have also put civil penalties on the executives that made knowingly stupid investments and took stupid risks. I am not a OWS supporter type, but it does seem to me that the risks that some of these banks took bordered on criminal action. I didn’t go to college and I don’t have a business degree but I can tell you that it is a terrible idea to loan $400,000 for a home to someone with a 50k a year income.
Maybe I am wrong in my understanding of how things went down, but the banks loan departments didn’t care who they loaned money to for they just packaged up all the loans and sold them. As far as they were concerned it was someone else’s problem. For that they should be held liable. But I think the major issue with the bailout is that the banks got saved, but your average family who is in trouble is told tough shit. The banks and the car manufacturers seem like they can make any decisions they want to and if they get themselves in trouble the taxpayer will make it all better. But if you are a taxpayer and fall behind on your mortgage or car payment see what either of those two entities will tell you if you ask them for some help. Help in their eyes only works one way.