Mortgage Bailout Boondoggle

I’m not sure I can be ticked off anymore.  It seems that every day brings some new horror from Washington.  If George Bush was as incompetent as Obama, he would have been thrown out of the White House by now.  Of course, as it is, the Kool-Aid drinkers think Obama is the second coming.  (Have we checked is hands for the nail scars?)

We have not heard that the Government will now be bailing out people who are “under water” on their mortgages.  Tell me again why we are perpetuating the problem.  What are these people learning?  It’s kind of like that kid we all knew growing up that was always in trouble but had parents with the right connections to get him out of trouble.  Usually those people grow up to be complete idiots expecting to be bailed out at the sign of trouble (i.e. not learning to deal with life).

Now, Mr. Obama has proposed $75 Billion to assist people to stay in their homes by allowing assistance to mortgage holders to rework the loan terms and the courts to force it if it comes to that point.  Do we need this?  Where is the responsibility on the part of the home owner who agreed to the terms of the loan when they got the house?  Why can’t the home owner go to the mortgage lender and work out some type of deal?  Some money is better than no money, right?.  Do we really need government intervention on this problem?

I guess the point of my ramblings is that I’m tired.  Tired of seeing my hard earned money that I turn over to the government in taxes thrown down the bottomless pit of all these worthless bailouts and social programs.  Like it was when we were children, we need to be able to fail and learn our lesson.  Without  those hard lessons, we’ll soon be back at the plate asking for more.  When will this nightmare end???

Of Course, that is just my opinion.

Rob’s Rant

Source: http://www.businessweek.com/bwdaily/dnflash/content/mar2009/db2009034_993400.htm?chan=top+news_top+news+index+-+temp_top+story

House Banking Committee Video – http://www.youtube.com/watch?v=LPSDnGMzIdo

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9 Responses

  1. A few questions,

    Your own home value may be underwater. Have you been irresponsible? Would you just let everything go down to very low prices? How many children would you like to see living out of cars? Would you force everyone to pay high mortgages for properties no longer worth their price?

    What economic measures would you propose to stabilize prices, if any? Why is it incompetent to try?

    Without support of some kind, this is what is likely to happen:

    a) prices of homes would spiral down to essentially 1989-1991 levels. That may not be bad as there would be lot’s of good homes to purchase.

    b) anyone who has a $200k mortgage on a home worth $80k would just walk away. This factor propels prices downward (too much supply), dragging down other homes.

    c) these walkaways would get a discharge in bankruptcy court. They would have all of their debts discharged (credit, cars, etc…)

    d) banks are left holding the property which they can only sell at very low prices. Several banks would now default. FDIC would cover deposits.

    So doing nothing is essentially discharging everyone who owes money from all of their debts. It is also a forced bankruptcy of the banks. You also then get to pay everyone else’s FDIC deposits. Add up those costs and that is the price of doing nothing. It would exceed several Trillion dollars.

    Alternatively, spend $75B to create a safety line on property values.

    How incompetent is that?

  2. Good points Anonymous, but where will things really end? What happened to personal responsibility?

    While I don’t have figures at hand as I am writing this response, I know there are loads of people who over extended themselves into homes they shouldn’t have been in in the first place. You have to think long term about this stuff.

    How about those people in trouble work something out with the lender itself. With banks struggleing, they would much rather have a payment than an underwater house. I wouldn’t want a court or some government official renegotiating my mortgage. Again, how about personal responsibility?

    The government has been in the banking business for some time through the Community Reinvestment Act (http://www.dollarsandsense.org/archives/1997/1197campen.html) by relaxing rules on home ownership, especially those in lower income brackets. Was this really a good idea to force banks to lend to these higher risk individuals without charging a premium?

    If I refuse to let my kids fail in their endeavors they will never figure out how to succeed. Failure leads to success. It is going to be painful for the country and those most affected by the financial downturn, but if we continue to throw money (print money) at the situation, the problems will be prolonged. (see Great Depression).

    Bottom line, where does the madness end?

    If you are in a house you can afford

  3. This problem was not created by the Community Reinvestment Act. The article you post is bogus because of its many factual errors. For example,

    – CRA has been around since 1977. The Regan Administration took office in 1981.

    – CRA does not mandate a reduction in the 28/33 % rules or the minimum 20% rule. Mortgage rules are the same across the nation, whether you live in red-lined area or the suburbs

    With so much other evidence to the contrary, is it really even plausible to say that a program that began in 1977 is the cause of a market bubble in 2005?

    The roots of the mortgage problem started in over developed areas like California, Arizona, and Florida. Overwhelmingly, these new development projects were constructed in the available open spaces of suburbs. As home prices kept rising, fewer people were able to afford them. Enterprising banks began offering exotic mortgage vehicles like derivative backed mortgages, negative mortgages, 100% mortgages and even 125% mortgages.

    Mortgage brokers and most banks didn’t care because mortgages were secured by insurance companies (AIG being a primary player).

    All bubbles eventually break, and this one started as follows. Home prices are based on comparables. Your home is worth the average of the last three homes that sold in your area. Eventually prices reached a high and builders could no longer move inventory. Prices had to drop, and drop, and drop.

    There are lots of cases of individuals who got in over their heads. Those that couldn’t pay (say a waiter buying a $500,000 condo) lost their homes. Those homes were foreclosed long ago. This became a huge spiral down. This flooded the market with even more houses that would go at even lower prices.

    You might say that the dummies that bought high were irresponsible, and you might say that the children of the middle class shouldn’t have bought at high prices, but whatever you say this crisis did not start at the low-income.

    The Bush Administration wanted banks to voluntarily modify loans. It is a well intentioned idea that went nowhere. To do so, banks would have to voluntarily take a write down and too many write downs triggers auditors and bank takeover.

    A bit about personal responsibility. Suppose you purchased a home in 2002 for $240k. You never took out a second mortgage or refinanced. Now prices in your neighborhood are now down to $180k. You are underwater.

    What kind of planning tool would be available for this home owner? What is this family’s best financial strategy? Pay the mortgage until it is worth $90k?

    Their best strategy is not to stay in the house. Whether you like what is going on or not, it doesn’t take a brain of a rocket scientist to see that the downward spiral is now fueled by a secondary wave of owners trying to maximize their gain by leaving homes.

    Your post is not “People, stay in your albatross homes. Somebody has to hold the line.”

  4. So what you are saying is that Big Daddy Government (sorry, the tax payers) should step in, again, and bail everyone out.

    I realize there are plenty of people with homes that have reduced in value and now they are underwater. What I expect from responsible citizens is to pay their obligations.

    The comment – “Their best strategy is not to stay in the house” – is assuming that these owners have no money and are not able to pay their mortgage. If they are able, why should they not pay their obligatations. Regardless of the value of the home, this is irresponsible by any stretch of the imagination. Sounds a lot like an irritated kid – “I’m taking my toys and I’m going home!”

    The CRA is partly responsible for this wave of problems with low income home owners that should have never received loans in the first place. It is not responsible for for the home owners that took on too much home simply because they could afford it. That’s irresponsible. As a responsible homeowner, I pay my mortgage regardless of my current homes value even though I know my home has not gained in value.

    Again, it’s personal responsibility. I know, that’s too much to ask for an electorate that is now used to sucking off the teet of government. Where does it end? It won’t unless we make people accountable and stop the quick march to government control of every aspect in our lives.

  5. CRA is not in any way responsible. CRA does not give out exotic mortgages. Exotic mortgages were available to everyone. Over 95% of the defaults are to middle and upper middle class who are not in CRA areas.

    The proof is where have the major foreclosures occurred: they didn’t occur in Harlem or Watts. They occurred in the suburbs of Phoenix and Compton, CA.

    A very interesting point is the comment and question you posed.

    My comment was: “Their best strategy is not to stay in the house”

    Your question was: “If they are able, why should they not pay their obligatations (sic)”.

    It does not assume that the owner has no money or is not able to pay their mortgage.

    “Their best strategy” is both a real economics as well as a psychological question. Best is how you maximize personal gain.

    You know that businesses and individuals do declare bankruptcy. It is a viable legal option that is used to regain financial footing. From your point of view, or from mine, they shouldn’t have gotten into this financial state, but for whatever reasons they do.

    So let’s say you bought a home for $400k and it will now sell for $180k (there are places like that). How long are you going to pay $3k/month when you could be paying $1k/month?

    Best says dump that property. Not everyone will take that strategy, but if enough do, the bank is in trouble. Unfortunately, I do not have figures on how many dump over priced properties. I will try to find it. I personally know that this is a real issue, on top of all of the other reasons for foreclosure.

    So how do you stop a downward spiral ? Bailout is not the answer — and not what Obama proposed. Stopping the spiral means setting a floor. Let me know which ones of these you disagree with:

    – if possible, let the bank modify terms of your loan so you can afford your home

    – if not possible (bought way too much), make payments or lose it in foreclosure

    – allow anyone (regardless of place, home price) to refinance at a lower interest so long as their home value is within a certain range of their loan value (say 110%)

    As more people keep their homes and fewer homes go into foreclosure, prices stabilize.

    My original response was to show that of the two strategies (do something v do nothing), which ones cost the tax payer less?

    I’d like to hear how you would answer that question.

  6. Great comments. Love the banter.

    The CRA has forced banks to reserve a portion of their loans for lower income individuals. It is part of the problem, not the whole problem. As I have mentioned earlier, those that bit off more than they can pay for are also to blame. Lots of blame to go around, but the ultimate responsibility falls to the home buyer.

    It may be the easiest way for some to dump their home, but where does that leave them? Are the able to get another loan for another home? If they don’t want that and are willing to drop their obligations, regardless of the value of the home, then that could be their best option. Slimy and low-down, but that is an option.

    The points you have proposed are great, as long as the government is not forcing the situation. Sounds like you are in agreement and this is something I have already brought up – more as a concept than a specific list. The smart thing for the lenders to do would be to get ahead of the problem and get something instead of nothing.

  7. CRA requires banks to make safe and sound loans that pass standard mortgage requirements. CRA is an anti-discriminatory law.

    In 2008 congress held hearings in CRA and Fannie and Freddy and found no link between CRA and the mortgage crisis.

    The Cato Institute, respected, liked by conservatives, called CRA a success and redundant. The success came because it stopped red-lining (if you are not familiar with it, I can provide you the details). Redundant because access to credit is now a given.

    CRA does not force or require banks to allocate a portion of loans to lower income. What it says is that in any given area served, loans should be proportional to the population. In other words, they can’t all come from rich white baptists. Mortgages must meet federal standards. Those standards went crazy in 2003 or so, but they went crazy for everyone, not just poor people.

    CRA does not in any way lower credit standards. Sorry to blow your bubble here. Maybe we can get on to paying attention to the real causes of this problem.

    From my experience, people who dump their homes make out very well. Since there are plenty of homes out there to rent, they can usually rent a home for a while at a great price (and far less than the $3k they were paying).

    After 7 yrs or so (probably much less as soon as banks get over foreclosures) they’ll be able to buy again.

    I am glad you agree with the concepts and list of points. I should warn you that many of these points are on the Obama housing recovery list.

    What Obama proposes, and we can debate the merits of it all, is that above and beyond the list of what this fixes is to PROVIDE BANKS with a direct payment to make sure that they keep people in their homes.

    So what is the benefit to you and I? In my estimation, it may be a bitter pill but it is likely to be a much smaller pill than if we let everything go down the tubes.

    We are sure to debate this last point, but we should at least establish the goals before we decide what we are debating.

    • CRA requires banks to make safe and sound loans that pass standard mortgage requirements. CRA is an anti-discriminatory law.

      The CRA does all this, but at what cost. From my perspective, and that of many others, this forces the banks to lend to low-income individuals to keep their score up in a range acceptable. Sounds more like government intimidation than sound banking policy. Lenders should be lending to individuals and businesses based on facts instead of to maintain some government score.

      In 2008 congress held hearings in CRA and Fannie and Freddy and found no link between CRA and the mortgage crisis.


      Congress is the entity that had a hand in this crisis. Rep. Barney Frank and Rep. Chris Dodd had massive control on what actually happened in the banking sector. For all his shortcomings, Pres. Bush actually tried to bring up the problems back in 2001 with Fannie and Freddy but was shot down by the house banking subcommittee. http://www.youtube.com/watch?v=LPSDnGMzIdo. Pres. Bush should have pushed harder to head off the problem, but the banking committee should have been responsible (there’s that word again) enough to set aside their partisan ideas and tackle the problems with Fannie and Freddy. I know, too much to ask.

      From my experience, people who dump their homes make out very well. Since there are plenty of homes out there to rent, they can usually rent a home for a while at a great price (and far less than the $3k they were paying). After 7 yrs or so (probably much less as soon as banks get over foreclosures) they’ll be able to buy again.


      Yes, this is an option. What I have been asking, and will continue to ask, is where is our personal responsibility for our obligations. Is it the banks fault that a home value is underwater? No. I think you would agree with that. I realize you are bringing up the point just to bring up an option, but this is totally irresponsible regardless of whether it is an option or not. I suppose this is a sign of our declining values.

      In my estimation, it may be a bitter pill but it is likely to be a much smaller pill than if we let everything go down the tubes.


      You are correct, this and several other things are bitter pills, but if we continue to choke down these pills we will soon overdose. How many are you willing to choke down? Personally, I would rather have a quick meltdown of the economy where we can start to rebuild instead of a protracted one we had in the late 30’s and early 40’s.

      I’m glad someone is reading my opinions with a different point of view. Keep commenting and thanks for reading.

  8. CRA does not in any way force banks to give out loans to unqualified buyers.

    It is an anti-discriminatory law. To believe otherwise is to not understand the law and how it is applied.

    In the past, if there was a community of 100,000 qualified customers, banks would only serve the ones in preferred communities. It literally would only open branches in preferred communities and only take applications from preferred communities.

    CRA looks at the distribution of qualified buyers, there are some are in every neighborhood, and measures how well banks meet the needs of individual communities.

    The people served are qualified buyers like teachers, police and fire who before could never get a loan.

    There is actually no system in place under CRA to force a customer into a mortgage. Mortgages are now computerized, color blind, district blind, bank blind, and must meet qualify federal guidelines.

    It is time to stop pushing an agenda against the working poor to meet some notion of market meddling that does not exist.

    In 2008 congress held hearings in CRA and Fannie and Freddy and found no link between CRA and the mortgage crisis.

    Your response is a gross misinterpretation of what goes on at congressional hearing. Congressional hearings are made up of members of both parties. If Republicans felt that that CRA was at fault, they would have questioned witnesses about CRA’s role. It never came up.

    The blogosphere is pushing this agenda but members of Congress are not. Even Rush isn’t pushing this. At some point the reader has to decide what makes sense and what doesn’t and it just doesn’t.

    If CRA was the problem, Congressional Republicans would be all over it. They aren’t.

    Your video link, about Freddie and Fanny

    CRA is never mentioned in the video. You are confusing low income with CRA. Freddie and Fanny (F/F) bought and sold mortgages. So did every bank: Citi bank, Bank of America, etc… This video is about the balance of risk assumption at F/F.

    Personal Responsibility

    Hey, we all wish everyone did, from overweight smokers to people who won’t save money.

    Quick recovery

    Prices for homes peaked in 2005 and then started to drop. We are in 2009 now and so this is getting to be a 4 year drop. At the moment 20% of US home owners are underwater. Letting home prices drop on their own at this point means we’ll reach 50 – 70% underwater (see my math below), and it will go on for years, at least 5 -7.

    Setting a soft landing for prices means a recovery quite possibly in the next 12 mos.

    50% underwater ? It can really happen. Most people are in their homes 20 years or less. Let’s argue that 80% of home owners bought at or after 1979. So when home prices today equal to 1979 prices, then 80% will be at the water mark, or under.

    1998 is about the time when 50% of current home owners bought their homes. So when prices drop to 1998 prices, then 50% of home owners will be at the water mark or under.

    Prices today are roughly the prices at 2002 and still dropping. We are not that far off.

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