I need some serious convincing on this mortgage bailout thing. Is it not a fact that home prices were becoming ridiculously inflated, particularly in some areas? According to zillow.com the dumpy little house in a terrible neighborhood that I grew up in in Pomona California, which my parents bought for 10,000 in 1960, is now worth 278,000. Have wages escalated in California so much after I left that your average low income person could afford the mortgage for that awful house? Do McJobs there pay that well? I’m no financial genius, but I’m not an idiot either, which I would say is true for most of us trying to get a handle on this mess. Right now, my inclination is to say, let it crash, at least we would be starting out clean after the disastrous tsunami recedes. It sounds to me like the wall street people are just trying to maintain the status quo that got is here in the first place. Houses only have the value inherent in a buyer’s ability to pay for them. If prices don’t come down, or wages don’t go up (I personally make 1.50 more an hour than I did in 1981!), I don’t see anything to be gained for us in the working stiff class by the gov. buying up mortgages at their “hold to maturity” price to keep housing prices up. Someone please tell me where I’m wrong. I’m getting a headache.
I am paraphrasing what I have read from other posters here so sorry to them for repackaging their words but a sincere thanks to those who have helped sort some of it out.
Clearly the housing bubble got out of hand. It is somewhat akin to the Dot.Com boom where many companies were hugely overvalued. A correction is needed and not, in and of itself, a bad thing. Unfortunately it is the scale of the problem prompting the need for a bail out of the system.
The problem arises when so many bad loans were written. Loans given to people who by no means should have gotten one (e.g. they had no job and/or no other assets, etc.). These loans were often packaged to be attractive then did a sort of bait-and-switch and all of a sudden many people found themselves in an untenable debt situation and default on their loans.
Then this moves over to people who possibly were trying to be responsible. Someone who bought an affordable home to live in and do their thing. Price values plummet on their property because of the number of defaults in the first group. They wake up one morning and find they have no equity in their home with a huge mortgage and no reason to expect to see any equity at all in their home in the next (say) decade. These people often just walk away from their obligation.
The whole thing spirals worse and worse.
Now the financial institutions have been using these mortgages in a MASSIVE money wheel. Really staggeringly huge. Trading risk back and forth among themselves and investors. All of a sudden they woke up one morning and all that fantasy money (really was manufactured wealth shown on balance sheets in no way supported by assets…not even close) disappeared. They have all this massive debt and no one wants to buy any of it. This produces a severe liquidity problem. These companies have no money to continue business. Like if you have $100 in the bank and a $500,000 house that is now worth $50,000 and even then no one wants it. When your car payment for $200 comes due you can’t pay it. You have the house which once-upon-a-time secured your car loan. Now you’ve got jack and you are screwed.
Say hello to bankruptcy court and say goodbye to most of the large banks/investment firms on Wall Street. Now there is no credit to be had. No one can buy much of anything and we’re headed for a serious Depression not seen since the Great Depression of the 1930’s.
So, the government is saying it will buy all this bad paper thus removing the debt from these companies and allowing them to continue and the economy to function. Unfortunately they probably do have to do this as the alternative is even worse to contemplate.
I have always said roughly the same thing you did pohjonen. Let the prices crash and burn and get it over with. This too shall pass. I bought a house in the super-hot Boston market during the boom-time and rejected the offers for what the banks said we could afford which was absurd and basically all of our income. Buyers that took them up on that deserve blame as well. Anyone can afford a calculator and common sense is free. I don’t see any of this as punishment. That is just simple economics and maybe a hard crash will prevent it from happening the same way again. There are 25 year olds getting married now who shouldn’t be forced from buying their own house because arbitrary programs are keeping the prices too high.
In general I agree and ordinarily a timely market correction would have stung, some people would have gotten nailed and everything marches on better for it.
In this case the knock-on effects are too big to ignore (unfortunately). It could easily spiral into an overall depression.
As for the punishment it is still unsure who will get “punished”. The Dems are saying there should be relief for mortgage holders. Others do not think that is supportable and let them sink…it’s their own fault. Meanwhile they are all talking about bailing out the banks that concocted this mess. If anyone should get stung it is the banks that did this to us.
The good news about price deflation: since I’ll probably be moving out of Cleveland, a few more cities where housing was once quite expensive have now returned to the range of affordability for an urban planner. For me, Denver, Fort Collins, Portland, Phoenix, Austin, and most of Florida are now back in play.
The bad news: there was never really a bubble in Cleveland, but there was still the crash. Home prices here are at 1980s levels in some neighborhoods, thanks to the bursting of the national bubble and fire sale-priced foreclosures flooding the market. The foreclosure next door is selling for one-third what I paid for mine. Remember, this is in suburban Cleveland, where average home prices never really peaked above $150K. I’m going to either lose a LOT of money by selling, or deal with the hassle of being an out-of-town absentee landlord.
My mortgage, FWIW: 30 year conventional, 20% down. I got screwed despite being prudent with my financing.
Thing is, that’s exactly the attitude the government took with the Great Depression. And it didn’t just pass. It went on and on and on and got worse and worse. It only got better with government intervention and a war.
As a matter of policy, it is in every government’s policy to increase home ownership and home prices. At some levels of government (think of your local homeowner’s association) the major thing government is for is to preserve and increase home values.
Why?
Have you ever signed a mortgage? You go into the closing a happy-go-lucky kid and come out an adult who suddenly sees the importance of keeping the grass cut and the front door painted. Home ownership, like marriage, makes people responsible citizens.
We want home prices to go up because for most people, this is the biggest (or only) appreciating asset they have. Governments tax based on value so the more prices go up, the more homeowners and governments are happy.
When home values go down, so does tax revenues of local governments and the net worth of most households. With less net worth households spend less. When people spend less, well on and on and on.
Does that help?
When you are 65 and most of your wealth is tied up in your home (which is common for Americans) and your retirement plan is to sell your home and move into a condo or townhome for half the price and live off the proceeds, social security and a small pension - watching your home value plumment is watching your retirement disappear.
My parents are unlikely to be able to afford the retirement they planned for (and saved for) - they are close to retirement age with their assets split between the house, the stock market, and CDs. CDs are at least holding their value, but they sure aren’t paying much interest…and my parents don’t have time to wait for a market rebound.
Ah yes. The best way to increase ownership - raise prices!
An asset bubble of any type is necessarily produced by a case of collective delusion. They happen because enough market participants buy into an idea that is economically unsound. The type of thinking exhibited above is a good example of this.
No Paul, that doesn’t help. And here’s why: No one is addressing my point that incomes (for most of us) have nowhere near kept pace with the astronomical inflation in prices. That house I grew up in has inflated twenty fold. As I said, in 1980 I made 1.50 less an hour than I make today. What does that mean when inflation is taken into account? Now throw in that any old full time job in 1980 got you free health insurance, and now you pay half of your own (if you are fortunate enough to have your employer offer it at all). How does this bail out help any of that? To me, the course we are on is unsustainable NO MATTER WHAT unless these issues are addressed. People whose real incomes are diminishing yearly are in absolutely no position to purchase houses for which prices are INFLATING annually. An enormous correction is still needed… or am I crazy?
If the only people who got hurt were those who bought untenable mortgages, this would be fine. (We’ll neglect the assignment of responsibility for the moment.) But there are plenty of others who would get hurt also
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the people who bought and could afford the mortgage. They are now sitting on more debt than the house is worth. No problem, maybe, but if they have to move it is a problem. Around here, you either bought a more costly house reasonably close to work, or a cheaper one 50 miles out. Those prices are getting hammered even worse.
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All the neighbors, who have to deal with a bunch of abandoned houses, which attract blight and crime.
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Local governments, whose property tax rolls have taken a beating. Unless you want to raise tax rates (impossible in California) or sales taxes or use taxes, schools and public services get hit. You don’t want to raise other taxes, since people will have even less money due to unemployment and the slowing economy.
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Merchants. People have been buying things using the equity in their homes, right or wrong, so the plunge in this kind of loan from the decrease in house prices is going to hurt. It is inevitable, and it should have happened 5 years ago, but it is something to consider.
So the problem here is the large number of innocent bystanders who get hurt.
I posted this in another thread:
So, because in California, it’s impossible to raise taxes, it becomes necessary to artificially prop up real estate prices?
- You guys deserve whatever government you elected to pass THAT law and
- I doubt that’s the case anywhere else.
The Paulson Paradox
Any economy so fragile that it’s very survival depends on massive and immediate infusions of government money needs to collapse so the process of building a fundamentally sound economy can finally begin.
Bush “I really think the American people are going to get their money back on this one” (paraphrased from a recent address)
I swear they sound like addicts. The whole economy is addicted not just “Wall Street”. That means all of us to one degree or another.
Notice the debate is on how to spend trillions, not whether it should be done at all.
Like a smoker deciding whether to buy a pack or a carton, when the best solution is obvious to any outsider: don’t buy or smoke one more single cig. Sure it will be rough, but it isn’t like a one gets less addicted as time goes on. There is no time like the present.
Okay, helping to prevent foreclosures helps EVERYBODY. Say you have someone in a house they paid 100K for and financed it 100% on an ARM. Dude’s going along making payments and managing–until the ARM goes up a shitpot in a month (I am not joking, while I was working in an appraisal office last year I had a call from a woman whose monthly payment went up $1500 in less than a year due to interest rate hikes on her ARM, it’s been very, VERY bad out there) and all of a sudden his mortgage payment is now twice what it was–how many of us could absorb that easily? Show of hands. Mmm-hmm.
He tries to refi, but since the housing bubble has burst and a lot of other people have already defaulted and been foreclosed on there’s a glut of available houses but no loans getting written unless you walk in with a 750+ credit score AND 20% down in cash. Mr 100% Financed Guy is fucked–can’t afford his mortgage, can’t sell the house, hasn’t been there long, isn’t that invested in it, walks away. When his house forecloses, every other house on his street takes a 1% value hit–times the number of other foreclosed houses in the neighborhood. Everybody’s value goes down, everybody loses equity, nobody can sell their house because it doesn’t matter that you were responsible and now have to move to another city in order keep your job you STILL can’t find a buyer and you are friggin’ stuck. Except you CAN’T just walk away, you put down 20% on your house and have equity and if you walk away you lose real assets–so you’re even more stuck than the Foreclosure Gang.
So to keep those of us who are responsible from getting screwed, we step in for a much lower amount of money and we say “Okay, Mr 100% Financed Guy, here’s the deal. You bought your house for 100K but at the time the values were inflated by this whole subprime boom thing and we estimate that a more reasonable value for your house at that time was about 75K. You can’t sell the thing for 50K right now with a gun to your head. We’re gonna refi you at a fixed rate based on the 75K number your house shoulda had when you bought it. You can’t refi this loan, it has to be paid off, and when you sell the house the new buyer has to assume this same loan. When you sell, you get to keep half the equity, the rest goes to the government as our payment for helping you out, sound fair?” Guy accepts, stays in house, foreclosures stop, neighborhood home values stop tanking, reduced glut of vacant houses encourages prices to rise, original lender gets smaller interest amount from the refi’d, gov’t backed loan that can’t be sold off to somebody else, everybody wins. It’s very likely the gov’t makes money on the deal, since most people plan on holding on to their houses and building equity. We might have to wait a while, but eventually that half equity deal will kick in, generating a nice chunk of change over time.
This is a much cheaper plan than giving free money for nonexistent debt assets to Wall Street. It has real benefits on the ground where it matters most. It has accountability, it has transparency. It helps everybody, not just the irresponsible. It makes the original lenders pay in lost interest money for their bad judgement, but doesn’t jack them out of legitimately deserved interest payments.
So far nobody’s told me any reason why this is a bad plan.
[Troy McClure/]No, you are not crazy. [/TMcC]
It is the policy of each homeowner and governments made up of homeowners, to protect and increase home prices. If (as some have pointed out) this leads to an insane endpoint, well, duh.
And that point of Duh is now.
A decease in home values will have bad impacts on homeowners and governments. It will have good effects for those who wish to buy homes and who have nice pensions.
Well.
1 : Actually, it ( Proposition 13 ) was passed by public initiative. So it’s even more the fault of the public than you think.
2 : Given the anti-tax mania in America, I’d be surprised if similar self inflicited cripplings haven’t happened elsewhere.
The way it works here, and in every other Canadian city that I’m aware of, property taxes are revenue neutral - The assessment is done independently of government budgets, and after the assessment at market value is done, the tax rate is set by simply dividing the budget by the total assessment value.
Four excellent points. People seem to think this is a few billion in sub-prime loans and a few greedy bankers.
I think the merchants and the economy in general is the biggest problem; for most people, owning property is their major or sole means of saving. Now the house prices are down, everybody in the country who owns property has lost tens of thousands of dollars. If you own more property, you’ve lost more money. If you find you need 50 thousand for a medical emergency, you may now be looking at foreclosure.
Moreover, and I think this may be the biggest problem, if you were feeling secure, knowing that you could get a home equity loan in an emergency, you are now feeling insecure. If you have a few thousand, you’re going to sock that away, not spend money on dining out or redoing the rec-room. That’s going to make a trillion dallar dent.
Frankly, I don’tsee how the Treasury can do anything about that.
Try this one on for size:
Step 1: Government encourages and organizes value producing activities like educating the workforce, investment in infrastructure and capital goods.
Step 1a: In the mean time, the price of housing is left to the free market. Supply and Demand ensures that there is neither over or under supply of housing.
Step 2: Economic expansion through increased productivity by better educated workers with better capital and infrastructure. (i.e. PROFIT!)
Step 3: Eventually, more profitable uses are possible for the land underneath many houses, which would be signaled by people willing to pay more for them, with money that they have earned through increased productivity.
Step 4: Original owners sell houses for a profit, which is broadly in line with the growth of the economy in general.
I guess such a harebrained scheme would never work in America. Your government sponsored housing Ponzi scheme(defined as an investment structure where previous shareholders are continually paid off by new shareholders) is much better.
I can’t expect Congress to do the right thing. Most of these guys are tied to those who benefit from the mess housing & lending have become, & will try to prop the whole obscenity up. But believe me when I say, I think we need to scrap the paradigm entire. Mortgages have always been a drain from the productive to usurers.