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The Bailout Game

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Nothing is more foreign to the average native New Yorker than the concept of home ownership. The vast majority of people in the five boroughs rent their small living space from a landlord, and deal with superintendents, noisy neighbors, roaches, shared laundry machines, trash disposal rooms, and alternate side of the street parking. I spent the first 31 years of my life living in rented spaces. The apartment in Queens that I grew up in, where I experienced my childhood, where my youthful memories reside, is now being rented by some other family who probably also lives two year leases at a time, just like my family did.

A few years ago, at the ripe old age of 32, I decided it was time to start looking at home ownership. Seemed to be a popular choice at the time, and I figured out that over my lifetime, I had paid over $60,000 in rent. Not a king's ransom by any means, but certainly I'd have been better off if at least some of that money went to equity I owned. And with rents in the NYC area rivaling the monthly cost of a mortgage, it was worth doing without for a while in order to get that down payment saved up.

bailoutI remember the massive effort involved in working out the specifics of getting a home loan. The paperwork, working on my credit score, buckling down on needless expenses. The government was kind enough to have a program called FHA that enables first time home buyers the opportunity to get into the game without plunking down the full 20% down payment. In the New York tri-state area, considering a meager home price of $300,000, 20% is $60,000 – no small sum for even the most disciplined to amass over a reasonable period of time. And although my credit rating was higher than sub-prime, it was not stellar by any stretch, I assure you.

While I was new to all of the requirements of home buying, and while this whole thing was an exploration for me, I remember distinctly when my mortgage broker suggested using an ARM (adjustable rate mortgage) rather than a fixed rate mortgage. I immediately said no. My mortgage guy let me know that I could probably save money over the short term by going with an ARM. And while that may be the case, in terms of home buying, variability just didn't seem like a smart feature to have in terms of monthly payments. This is basic common sense. Would you go for variable rent? I don't think so. I declined and went with a higher 6% fixed interest rate. It might be more than what others might have been getting — this was during 2004/2005, when rates were as low as 4% for some ARM folks. But I didn't care, I was more interested in ensuring that I could keep my home rather than save a few hundred bucks here and there for who knows how long, only to get squeezed out when the payments grew. Besides, isn't one of the benefits of home ownership that over time, by virtue of inflation, that the payments decrease (at least in terms of dollar value)?

The house was great. But there were things that needed to be done. The windows were old and drafty. The bathroom needed work. A friend suggested I take out a second mortgage on the home to pay for these enhancements. That mortgage would ride on the back of the increased worth of the house that these changes would undoubtedly bring. I told my family that we'd do the work on the house, but no way would we take out a second mortgage to pay for it. Common sense once again told me that less is more when it comes to mortgages, and if I can't pay for these improvements to the home without resorting to more loans, I probably shouldn't be doing the improvements in the first place.

It's almost 2008. And guess what? This home buying noob, originating from a culture of renters, still owns his home, and is not at risk of being foreclosed. Because I listened to common sense, I don't need to be bailed out by anyone.

My property value has likely dropped as a result of the credit mess that this country finds itself in, but I can weather that storm. I bought my house with the long view in mind, and there is no question that in the next ten years (barring any extreme situation such as a massive terrorist attack on New York), the property should be worth substantially more than what I originally paid for it. Meanwhile, the amount that I pay each month, which is fixed, will continue to cost me less in terms of actual worth, because in ten years I will still be paying the same dollar amount.

Smart, eh? Apparently, I should have been much more stupid. The government is trying to bail out those who didn't consider the risks when signing up for loans outside of their budget, either as a result of sub-prime ARMS, and even for regular, non-sub-prime loans that are simply too high for them to continue to pay. The Wall Street Journal editorial page, with commentary from such fiscal giants as Alan Greenspan, has been ablaze all week with editorials lambasting this insanity, and rightfully so.

More qualified folk than myself can comment on the specific financial impacts to, not to mention the standing of, America's most valuable asset (this country's portfolio of mortgage backed securities) this bailout will have in the global marketplace. But forcing investors owning mortgage products into changing the rules of the game after contracts were signed doesn't raise the appeal of investing in America.

Clearly home prices are inflated, and the foreclosures that we are seeing are the natural process to correct that. This is healthy and necessary considering the recent meteoric and unsustainable rise in home prices, mixed with unrealistically cheap loans and overextended borrowers. Softening the blow by further reducing individual responsibility is senseless and regardless of intentions will do much more harm than good.

Previous attempts at bailing out sectors of the economy with heavy-handed price or wage (or in this case rate) freezing measures, such as the early '70s wage freeze, had an immensely negative unintended impact on the economy that took years to correct.

Moreover, for home buyers who are paying an overvalued mortgage, foreclosure is actually a good option. Better to leave a home that is overvalued, one you are paying too much for, than continue making payments for something that isn't worth it. Another way to look at it is this: why continue to pay for a home at a price much higher than its actual value, especially when that price is out of your range? Maybe the homeowner would lose their equity, but the same would be true if they were paying rent the entire time – with the added benefit of the tax deduction on interest. For the fiscally irresponsible, or those with interest only loans, this really isn't such a bad deal.

Rather than bail out those who made their own unwise choices, why not help the housing market by encouraging more first time home buyers by expanding FHA, the great program I spoke of earlier, that helped me and helps other first time home buyers get their homes. As wonderful as FHA is, it could be even better, by expanding the types of homes and the caps on home values (there are price and other limits on the types of homes that FHA will cover). Note that FHA isn't a bailout or charity – an FHA mortgage means that the government will back the smaller down payment, and the home buyer has to take out mortgage insurance. But it's a real mortgage, the private sector makes the loan, the home buyer has to qualify for the mortgage, etc.

The real problem is that the market is in a downturn. So what about cutting taxes to help the economy? Rather than bail out fiscally irresponsible adults, or looking to the fed to accelerate inflation even more with a lax monetary policy, tax cuts would actually put more money in the pockets of all Americans, not just irresponsible ones, who are feeling the pinch of the current downturn. Unfortunately, in the current political climate, this idea is pure blasphemy.

I know some holier than thou, newly fiscally restrained liberals are going to come out of the woodwork, chastising this Republican for daring to suggest more tax cuts, when the deficit is supposedly at an all time high and people are losing their homes. How heartless can I possibly be? And besides, our money is obviously needed elsewhere, for such things as government health care, more environmental programs, and other socially redeeming efforts, right? This viewpoint is eclipsed in its stupidity only by the mortgage bailout itself. I never said we can't pair tax cuts with cuts in government spending too – we should, and the bailout is the first place I'd start.

But we can't wait for spending cuts to happen, nor should we engage in some faux paygo nonsense (which the Dems have conveniently and thankfully dropped from their lexicon). We can cut taxes now. The government is already running a deficit and we are likely going to elect a Democrat for president in 2008, which will ensure a long and healthy life for our debt, with no dot com gold rush to cover it up.

All indications are that the economy will slow down even more in the coming months. Deficits are much more difficult to pay off when the economy is bad, and at the same time, paying off deficits doesn't help the economy. However, tax cuts done right can do both, by improving the economy and as a result, federal tax receipts, thereby reducing deficits.

Republican Presidential candidate Rudy Guiliani said in the recent Des Moines debate, "The strength of America is not its central government, the strength of America are its people… restrain the central government, and give the people more choice, more money to spend, and we will see the economy booming." He's absolutely right.

Cut taxes, and encourage more first time home buyers, and this economic rough patch might not be so bad. Bail out the fiscally irresponsible and engender more irresponsibility right when the economy is in a downturn, and do absolutely nothing to help, and possibly hurt the economy. Doesn't seem like that hard of a decision to me.

I think it's better not to destroy the entire concept of personal rights and responsibilities. Better to increase the deficit and help the economy, than to kneecap one of the greatest drivers of personal wealth (home buying) by tacitly approving irresponsibility in personal financial matters, while taxing the rich and middle class to pay for it all. The fact is that deficits can be paid down, just like they have been time and again during the boom periods of the last two decades. But screwing with the housing market, by engendering even more fiscal irresponsibility, isn't nearly as easy to fix.

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About The Obnoxious American

  • http://www.republicofdave.com Dave Nalle

    Great article, and right on the mark, with valuable personal insights. I wrote something along the same lines a few months back and no one paid any attention at all. Perhaps when you say it your way they will.

    Dave

  • alessandro

    Without a doubt. Absolutely.

  • http://rapturenutballs.blogspot.com Baritone

    OA,

    First, from what I’ve read and heard, the “bail out” is not really being offered to help the individual mortgagors, but rather more to save the butts of the lending institutions that will be holding the bag on all of the loans which are likely to go south in the coming months.

    While I agree that many of the people who have already or are likely to loose their homes are at least partly culpable in the whole equation, there are others who should share the blame, but who will likely get away with nary a scratch.

    Many of the hapless borrowers long believed that the so called “American Dream” of homeownership was beyond them. But then, the mortgage lending industry, seeing an opportunity to cash in on a more or less untapped market created, or perhaps more accurately, dusted off and updated what came to be called “sub-prime” lending. They marketed directly to people with marginal credit and/or spotty work records. They purposely designed the adjustable rate loans with low front end costs to further entice these people.

    Most of these loans were made either on-line and/or through individual mortgage brokers who are, frankly, the most predatory people in the business. These people are no better than your stereotypical used car or snake oil salesmen.

    You use yourself as a standard by which you obviously believe everyone should have comported themselves in this regard. Not everyone is you.

    For many of these people, the dangling carrot of homeownership was just too tempting. How many, even reasonably well educated people can read the typical mortgage agreement and other loan and closing documents and make heads or tails out of them? Mortgage brokers and other lender representatives are ready to quell any misgivings borrowers may have, repeatedly reassuring them that everything will work out just fine. They build a level of trust. We all want to trust people. But all too often the end result is that the borrower is the one getting shafted.

    The mortgage broker doesn’t give a shit. Nor does the builder. When they walk out of a closing, they’ve got theirs. Screw everybody else. When things get bad for brokers and builders, they more often than not pull up stakes and set up shop somewhere else under a different name, largely immune from any repurcussions.

    Caveat emptor, you may say. Certainly, these people carry some responsibility for their own decisions. It can be said that they shouldn’t play the game, if they don’t know the rules. Most of them don’t recognize it as a game.

    A report on NPR a few weeks ago revealed the results of a study of a large number of recent loan foreclosures. It stated that something like 70% of the borrowers who defaulted on their loans had reported inflated income figures. I spoke with one such borrower in the course of inspecting a home that was being sold via a short sale to avoid foreclosure (I am a residential appraiser.) The woman said that when she and her husband first submitted the application, they reported their income accurately. However, the mortgage broker came back to them indicating that all was for naught if they couldn’t report a higher income. He suggested figures that would work. With no little trepidation, they changed the figures to comply with the required income to expense ratios. Again, the broker reassured them that all would be well, that it was just a technicality. Not to worry.

    And here is an additional problem.In most instances, when someone applies for a loan, and especially a mortgage loan, all information on the applications should be confirmed via phone calls, mail, email, faxes, etc. Bank accounts, job longevity and status, income verifiation, etc. Many of these steps have been ignored, especially in connection to the sub-prime market. The lenders are not practicing due dilligence in verifying the information on borrower applications. Whose fault is that?

    You are correct about the Left/Right view of this. It is pretty much always the view of conservatives that the fault lay with the individual. That they are fully culpable and should be left to stew in their own offal. At the same time, the liberal view may well be too forgiving of the individuals involved in such predicaments.

    The fact is that there is a shared responsibility. The individual borrowers must accept that they knowingly over-extended themselves. But the lending industry, having adopted aggressive, predatory practices share heavily in the guilt as well.

    As to the Bush bail out. It may well cause more problems than it solves. There will doubtless be serious repurcussions throughout Investorland. But won’t massive mortgage foreclosures have largely the same adverse effect?

    Keep in mind that those who will qualify for this bail out are relatively few in number. Anyone who is already in arrears will not qualify. Also, many of these sub-prime loans – the greater portion of them, actually, were made not to prospective homeowners, but rather to investors purchasing multiple homes for rehabilitation and resale or as rentals. (That is especially true in the Indianapolis area market.) These loans will not be eligible either.

    Some of the homeowners who are in trouble are, in fact, being offered the possibility of refinancing their loans through FHA – at a fixed rate, but again, they must meet a fairly rigorous set of qualifiers to take advantage of the opportunity.

    Greed and opportunism brought us to this pass. Incremental drops in the interest rates will have little effect on what is a monumental problem. As you suggest, tax reductions may help, but they would have to be properly targeted. Aim them at the rich as has already been done, and the “trickle down” will likely be too little, too late.

    Just as an added note. The national debt is verging on eclipsing Ten Trillion Dollars. It was just over Five Trillion when GW took office. His administration has managed to nearly double it in less than 7 years. It is also likely that the debt maintenance on these loans will soar in that many of the loans made to us by China, Japan and other countries are, in effect, adjustable rate loans. If payments are not maintained and/or if the base amount reaches certain thresholds, the interest rates we must pay will rise significantly. What is it you said about the stupidity of borrowing money at an adjustable rate?

    Baritone

  • http://www.republicofdave.com Dave Nalle

    To be fair, the proposed ‘bail out’ isn’t really a bail out at all. It’s a pretty reasonable proposal to move people with rapacious loans into more conventional loans and from ARMs to fixed rate mortgages. A lot of these folks would actually have qualified for FHA loans, for example, and they’ll be moved to them instead.

    The proposal is also voluntary and lenders aren’t being forced to do anything. However, they’re likely to cooperate since giving borrowers better terms is a lot better than foreclosing on them.

    Key thing is that no taxpayer money is going to be spent on this.

    Dave

  • Doug Hunter

    I’m usually quick to place all the blame on the individuals, but, knowing a small bit about these mortgage tactics it is easy to see they need reform. Alot of these loans are taken under duress as well. Let me explain.

    There is zero requirement for a lender to give you any notice (and they rarely will in these instances) of the exact terms of your financing any length of time before your closing. They must give a so called good faith estimate (Read: useles piece of bullshit) which with these predatory lenders will invariably have a better rate and terms than your actual note at closing. The excuse will be that they just couldn’t quite get you qualified at the rate you discussed, but the teaser rate they got you was a point lower and hey you can always refinance again later.

    Why would you accept such a shit deal? Hmm. You’ve already sold your previous house or apartment. You’ve already scheduled a moving company or made moving arrangements. You’ve already forked over a couple thousand for earnest money, application, and appraisal fees. You have a certain deadline on your contract in which you must make the purchase. You know in one or two years you can’t afford the loan you’re getting into but you know right now you can’t afford not to go through with it. Where would you live? What would you do with all your stuff? How would you get the thousands you sweated to save and turned over to the scam artists back?

    What they were doing was an outrage (yet perfectly legal).

    Let the lenders fail and allow them to sue the predatory brokers out of business on they’re way down. Fuck em all. Investors will put together the pieces and housing will actually be affordable in the meantime.

    MY SOLUTION: Give lenders three days to give you a legit good faith estimate. If you fill out a true application, your good faith estimate must show your true locked in rate, terms, and lender/broker fees. If for any reason a more in depth check of your application disqualifies you from the loan program or forces you to higher rates and worse terms the lender must notify you in writing within 48 hours with the specific reasons(which will be monitored by the appropriate regulatory agency) The percent of good faith estimates matching loan terms could be reported as some sort of broker rating perhaps?

    This would actually allow borrowers time to make a decision with good information and plenty of time, not sitting at the closing table with all they’re possessions in a moving truck.

    …I know lenders will complain that this is too hard, but it’s not. They can quickly look at a few key numbers like debt/income, credit score, estimated payment/gross income, etc. and come up with a pretty sound estimate of what you will qualify for. Three days is plenty of time to do that. If they’re uncertain if a person might qualify for a lower rate, simply be conservative and put the higher rate on the good faith estimate.

  • alessandro

    Baritone: very well stated. You are right. It does take two to tangle. But the ultimate responsibility does reside in the individual. Just say no. The house may have been beyond the means of people and they were tempted to get one but they should have still been aware of what it entailed. This is the case in anything we buy.

    I worked in financial services so I know the games played. Too many times I witnessed people being herded into products that had no business being because the bank had to “pimp” it because some jackass upstairs had to justify his or her job and bonus. SO MANY “IDEAS” AT THE BANK ARE WORTHLESS.

    But not all of it is snake oil stuff. Some of it is decent. We just have to learn how to do it. I always say pray you have a smart, honest, dedicated investor friend. That way, if you lose you lose because of the market and you can pretend it’s all a big conspiracy and not because of incompetence.

    Smart, reasonable and realistic investors would grill us on some of the stuff for sale and would see right through it. They did their homework and they should not pay for the mistakes of others in my opinion. Of course, we never liked people who asked too many questions. Many of the questions were irrelevant and misguided. Still… I saw this with my own eyes: the savvy investor and the deer in the headlights investor. Sadly, as is the case and the way of the world someone is always stuck holding the bag. It’s one big game of musical chairs.

    People let their excitement get in the way of sound investment principles. OA is right: better to drop your saved pennies in equity. But only if you are really ready for it.

  • Doug Hunter

    alessandro,

    Did your company use the method I mentioned in #5?

  • Clavos

    “Why would you accept such a shit deal? Hmm. You’ve already sold your previous house or apartment. You’ve already scheduled a moving company or made moving arrangements. You’ve already forked over a couple thousand for earnest money, application, and appraisal fees. You have a certain deadline on your contract in which you must make the purchase. You know in one or two years you can’t afford the loan you’re getting into but you know right now you can’t afford not to go through with it. Where would you live? What would you do with all your stuff? How would you get the thousands you sweated to save and turned over to the scam artists back?”

    Easy solution to this dilemma. I’ve used it every time I’ve bought a house (7 so far). When you decide you want a new house, get a loan commitment first, before you even go shopping.

    Another solution: Make your offer on the house you’re interested in contingent on your ability to obtain satisfactory (to you) financing. No financing; no sale.

    Yeah, the lenders were predatory, but responsibility lies also with the buyers who failed to perform their due diligence.

  • The Obnoxious American

    Baritone,

    Regarding your first point, I agree that the lending industry wants this. That goes to my point regarding foreclosures being the right medication for the ill of having an overvalued home. Doesn’t change one ioda of my article.

    I do not agree that the culpability is shared or that asking people to have common sense is expecting too much. More over, if people don’t have common sense, it’s simply not the government’s job to bail them out of their predicament. Is the temptation of the dangling carrot of home ownership so compelling that these people couldn’t ask a friend for advice or read a website? These are not the poorest Americans we are talking about here, they do or can have a computer, and probably know at least someone who owns a house and isnt going into foreclosure.

    To your logic, because these people didn’t do their homework, we should change the rules that they agreed to? And the rest of us have to live with the impacts of that? Sorry, but no.

    Of course the broker doesn’t care. He’s a broker, not a care giver. And moreover, this is not a game, it’s serious business. And if people enter in without thinking of it as such, then that’s a problem they have to deal with.

    As far as speculators not getting the assistance of the program. That is the spirit of the bailout, but will it in fact be the practice? I think not. No question some of the bailee’s will be speculators, possibly of the lower income kind. Let’s not pretend that people who flip houses don’t ever live in them as well. Those people will qualify for the bailout.

    To your point about the couple who overstated their income. Are you casting them as the victim? They were told their current income wasn’t enough to get a loan. So by your description, they lied. Perhaps abetted by a shady broker, but who cares. They lied, and they even knew their broker was shady by not doing due dilligence. Are you seriously suggesting these very same people deserve a bailout?

    I do agree that the mortgage industry is at fault for approving suspect loans, this was definitely motivated by greed. All the more reason not to have any kind of a bailout. As Doug intoned, let the industry sleep in the bed it made. Investors will figure out what to do and home pricess will be more reasonable as a result.

    But bail out a few irresponsible people (as you acknowledge, a small number of people) and the industry will respond by making it harder for everyone to get a mortgage.

    To Dave’s point, this won’t cost us in tax dollars, but it will cost us for sure. Someone has to pay for those rate freezes. It won’t be the people paying frozen rates for sure – it will be the rest of us fools who were smart enough to actually understand what we were getting into.

    As far as the calls for more transparency in the mortgage process, I totally agree. How are we able to put a man on the moon, invent the internet and create 50 inch televisions that are under 2 inches thick, but we can’t figure out the total closing costs of a loan? And why does it take weeks or months? Obviously that aspect of the industry could use some cleansing light and soon.

  • The Obnoxious American

    BTW regarding your points about the national debt, Bush was not very fiscally conservative, we all know that now. I want to believe that he wanted to be fiscally tight with the government. I want to believe that were it not for 9/11, and the resulting wars on Iraq and Afganistan, the corp scandals, the inherited recession, he might have been more conservative with the nations money.

    It’s also possible that having a GOP president and GOP led houses of congress led to a feeling of impunity, and the president and his men lost their bearings.

    Ultimately, I think it’s a mixture of both scenarios, with a little bit of stupidity (in trying to appear bi-partisan) sprinkled on for good measure. Further, I also don’t think its that terrible of a thing, considering that the last 7 years have been pretty good all things considered.

    If you are a left winger, don’t start wagging your finger, lest it be cut off – as bad as Bush may have been for national debt, debt always been an issue and as I have said before, at least fiscal conservativism is on the GOP agenda.

    Clinton wasn’t a fiscal genius, and unless you really believe Al Gore invented the Internet, the fact is Clinton got lucky – he had what amounted to the gold rush of 1849 during his administration. Balancing the budget because you are getting record tax receipts on the back of a once in a lifetime boom period isn’t that neat of a trick. And mind you, I like Clinton, I really do, I thought he did a good job as president (I am more of a centrist than an ideologue). But I was alive back then, and I saw first hand what happened.

  • http://rapturenutballs.blogspot.com Baritone

    It’s telling that while conservatives preach of fiscal responsibility, lowering taxes and reducing government, they invariably build up record debt and budget deficits, and then dismiss them as if they have no consequence. It ususally then falls to a democratic administration to figure out how to balance the budget and reduce the debt. If, in the process, they find it necessary to raise taxes, the reps start yelling “tax and spend,” tax and spend.”

    At least dems are fiscally responsible enough not to spend money they don’t have.

    Your view regarding the mortgage dilemma does essentially come down to “caveat emptor.” Predatory lenders feed on the optimism people, mainly younger people, have regarding their future.
    Certainly they have a responsibility to protect their own welfare, but not everyone is as savvy as you apparently are. People tend to believe what others tell them. Especially if the broker or loan rep is wearing a nice suit and driving a flashy car. They tend to believe that the brokers, or loan originators are looking out for their welfare, and are being forthright and truthful with them. The reality is usually much different. Many of those people are snakes.

    I have had to deal with them in my capacity as an appraiser. After getting stung by a couple of independent mortgage brokers myself with non-payment of fees, I now refuse to do business with any of them.

    Further, I think you underestimate the repurcussions of doing nothing to stem this tide of foreclosures. We are talking about some major players in the business – Countrywide, Wells Fargo, among others – which could collapse. Just those two lenders alone hold billions of dollars in outstanding loans. The resulting turmoil in the industry should either or both of just those two companies fail could be catastrophic to the lending and real estate industries.

    Your stance is essentially “We’ll teach them all a lesson, by god!” The consequences of such a “lesson” could ultimately be ruinous to the economy.

    B-tone

  • alessandro

    Doug, well,

    I think there is a huge difference in the way things operate between where I live (Canada) and the U.S. The U.S. system is independent (mortgage houses) where they seem to lend out to anyone and have little problem throwing people in the streets.

    Here the banks lend out mortgages and are kept on a short leash. If they would hurl little Timmy in the streets they would be CRUCIFIED by the people and media. Everything is done from a client-first perspective and with a social conscience. Yuk.

    But there is no denying it works. Canada may not be as competitive but we do have one of the most efficient banking systems in the world. It’s tough to get a loan up here.

    I know I’m critical of Canada at times but there are all sorts of ethical rules in Canada that are good and it prevents the sort of stuff that happened in the U.S.

    So I have to agree with everyone here. There’s plenty of blame to go around but again, as OA explains, darn it go in EYES WIDE OPEN.

    From a business perspective, I’m not complaining about what happened in the U.S. drives interest rates down and keep the housing starts firm up here. As a newbie contractor that’s nothing but good for me.

  • wildnfree

    This bailout will not really solve the problem, but simply postpone it for the next administration to deal with. Also a number of these borrowers DELIBERATELY purchased homes that were far beyond their means just so they could keep up with the Jones for awhile. Some (but not all) of these folks planned to file bankruptcy on purpose when they lost their homes. Hey why not? Only in America do we have lenders watching the bankruptcy courts in order to make loans to the bankrupt. There’s no penalty for your irresponsibility, you just pay a little more interest and get back in debt.
    Of course you really screw the hell out honest, intelligent citizens when you do this. Even though private institutions make the loans the FHA uses tax funds for its operating needs. This is a case of both unnecessary individual and CORPORATE welfare.
    I would rather face this economic crisis now rather than to wait a couple of years for it to get even worse. Let some of the banks die and the rest will become sensible again. Americans are too spoiled and quite frankly most could stand a little hardship to help them reevaluate their priorities.

  • Baronius

    First rule of economics: the bigger the market failure, the more likely it is that the government is causing it. Look at the housing mess. The federal government pressures loaning institutions to increase their minority, low-income, and urban investments. In a fair market, the people who can’t afford loans usually wouldn’t get them. Over the last two administrations, mortgages have been easy to get.

    Baritone sees conservatives as cruelly holding back government. I see the restraint of government as one of the best things a society can do. If we get government out of the loaning business, this artificial market will dry up, and unprepared people won’t get loans.

    I’m to the right of Obnox on this one. He shouldn’t have gotten his loan without full backing. FHA distorts the market. He’s been disciplined and responsible, and good for him. But as a loaning institution, I shouldn’t be encouraged to take a risk on him. (Nothing personal, Obnox. If you can present your case to an unbiased loan officer and persuade him you’re worth the risk, then you’re worth the risk.)

    Since we’re all telling our housing stories, I’ll tell mine. I rent. I wish I could have bought a house a few years ago and made money on the housing boom, but I couldn’t. I was broke. So I didn’t apply for a loan, didn’t get one, didn’t get foreclosed on, and didn’t lose my meager credit rating.

  • Les Slater

    Japanese banks protest bailout:

    “Dec. 17 (Bloomberg) — Japanese stocks fell, led by Mitsubishi UFJ Financial Group Inc., after Nomura Holdings Inc. said the country’s three largest lenders were being asked to contribute too much to a subprime-asset bailout fund.

    “Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. paced the drop after the Nikkei newspaper said they will have to reply this week to a request by U.S. banks that the banks each provide a $5 billion credit line for the fund.

    “U.S. lenders including Citigroup Inc. are organizing a bailout fund to buy assets at structured investment vehicles, or SIVs, in an effort to prevent a fire sale as the vehicles’ need for cash rises.

    “‘For bank shareholders, this participation request is very unpalatable,’ said Tomokatsu Mori, who helps oversee $7.4 billion at Fukoku Capital Management Inc. in Tokyo. ‘I don’t see the logic as to why Japanese banks are being asked to save the financial system when they’ve had very little to do with the subprime problem. If they put in money once, there will be more requests in the future.’

  • The Obnoxious American

    Baritone,

    I think it’s a huge fallacy to say that Democrats have to fix economic issues caused by Republicans. If I didn’t know any better, I’d think you were playing some sort of trick on me with such a comment.

    As I intoned in the article, Clinton (whom Alan Greenspan referred to as the best Conservative president in decades) was not typical of the Democratic party, and even pretty much put the kabosh on his wife’s universal healthcare plan. Aside from him, prior Democratic presidents in the last 40 years, such as Kennedy, also employed distinctly GOP style tactics when attempting to improve the economy, such as cutting taxes. And it worked.

    No Democrat, preaching the type of fiscal restraint currently being espoused in the primary race, would stand a chance of balancing the government’s budget. Not a chance.

    As far as my view boiling down to caveat emptor, you are right. I don’t care how shiny the mortgage broker’s suit is, people are responsible for themselves. This is not a nanny state, it does not guaruntee protection from individual stupidity, nor should it and certainly not with the rest of us footing the bill.

    As far as my underestimating the impacts to the mortgage industry, well let’s remember for a minute that the bailout being pushed by the administration isn’t going ensure no one forcloses, but only a small group of homeowners who are in trouble. That said, I think it is you who are underestimating the impact that the bailout will have on the economy, Les Slater’s quote to wit.

    Incidentally, Baronius, I have since refinanced my FHA loan into a traditional loan, didn’t want to have to pay mortgage insurance and since my credit rating got better after buying the house, I was able to refi (fixed) at around 5% with no mortgage insurance. Who needs a variable rate?

  • alessandro

    Les, I belatedly answered one of your notes on ‘Iran Redux.’

  • Alec

    Interesting article, but wrong in almost every respect. Some of the subprime mortgage problem is an indirect result of the Bush Administration’s wrong-headed tax policy (more on this below).

    It’s typical, but wrong-headed of conservatives and libertarians to whine about “irresponsible” people looking for a bailout. The subprime mortgage mess is primarily the result of supposedly sophisticated lenders deliberately suspending their own lending rules in order to offer loans to people who would not ordinarily qualify for them. But instead of owning up to their own culpability, they recently try the false-sympathy ploy of claiming that they were only trying to help people achieve the American Dream of home ownership.

    But this kind of BS is like a businessman not reconciling his cash register receipts ot the till, and then complaining when, inevitably, his workers start stealing from him. Mortgage lenders were bending over backwards to make questionable loans, and then upping the greed quotient by repackaging them and selling them to other people who also should have known better.

    By the way, I particularly enjoyed a recent news story about a judge refusing to allow some people to be kicked out of their homes because their mortgage had been repackaged and sold so many times that no lender could prove that he held title to the property. The sophisticates were so busy playing games with intricate debt instruments that they lost track of the simplest accounting concept of tying their crap paper to a tangible asset.

    RE: Moreover, for home buyers who are paying an overvalued mortgage, foreclosure is actually a good option.

    Uh, no. Do you know anything about the effects of cancellation of debt (recognizing ordinary income) or having to recognize gain because the foreclosure on a personal residence is deemed to be a sale? Some recent Congressional legislation (interfering with the market!) might mitigate some of this, but not enough to prevent some people from possibly having a large tax bill as a result of a foreclosure.

    RE: But we can’t wait for spending cuts to happen, nor should we engage in some faux paygo nonsense (which the Dems have conveniently and thankfully dropped from their lexicon). We can cut taxes now.

    What a bunch of nonsense. Republicans used to deride Democrats for running deficits. Conservative economists used to deride Keynes and his disciples for daring to suggest that deficit spending might sometimes be an economic stimulant. But now, you are trying to embrace deficits without supplying any economically rational argument for doing so. This is truly, massively funny.

    Now, part of me does not care if banks or even foreign governments collapse because they were gleefully booking phony revenue from their investment in sub-prime mortgage instruments. But I note that even supposedly hard core conservative officials, and the Fed, are bending over backwards to protect “the market” and their well-heeled buddies. So there is a level at which the so-called free market is disavowing anything that represents a free market, when things get painful. Ironic, ain’t it?

    RE: Cut taxes, and encourage more first time home buyers

    Now, here’s the kicker. The Bush and Republican tax program is exactly antithetical to this. By insisting that investment income be taxed at lower rates than ordinary income (e.g. income from wages), you create a huge incentive for companies and investors to stiff the average guy and gal who otherwise would depend on a good job and salary increases to get them into home ownership. The present policy, built on the phantom bubble of ever-rising values of property without regard to actual income, only reinforces the mess that we are presently having to deal with.

    All tax cuts (or even tax increases) are not equal.

  • http:.//ruvysroost.blogspot.com Ruvy in Jerusalem

    Obnoxious,

    Bush was not very fiscally conservative, we all know that now. I want to believe that he wanted to be fiscally tight with the government. I want to believe that were it not for 9/11, and the resulting wars on Iraq and Afghanistan, the corp scandals, the inherited recession, he might have been more conservative with the nation’s money.

    Your big problem is that at the ripe old age of 32, you did not remember how Ronald Reagan ran your country from being a creditor nation into being a debtor nation. You bought the same old shit the GOP regularly trots out about “fiscal responsibility” without looking at the record. I remembered the record – from the homeless shelter I lived in during the Reagan Recession. That’s why I voted for Gore in 2000.

    I didn’t worry about what I wanted to believe. I looked at the facts. And the facts were that whatever one wanted to say about Bill having zipper problems, or using Arkansas state troopers to pimp for him as governor, or even his shitty record in trying to screw over the country I live in now, the Clinton administration brought in the first budget surplus since the Nixon administration. He did what he could to plug the leaky welfare boat. He even tried to get some form of universal health care started in your country. And Al Gore was all a part of that.

    Fortunately for you, you did the same when it came to your own wallet. You dealt with facts, as opposed to what you wanted to believe. So the sub-prime problem will not be an immediate problem for you. The ripple effect on your country’s economy will, though, and there won’t be a thing you can do about it. But that is not your fault, it is the fault of those who got good and greedy and managed to finally kill the goose laying the golden eggs in your country with a stupid Ponzi scheme.