Save Subprime Borrowers, Not Bloated Bankers
There is a simple and direct way in which the federal government can help out millions of moderate income families struggling to keep their homes. They can simply change the rules on foreclosure to allow moderate income homeowners the option to remain in their homes indefinitely as renters, paying the fair market rent.
This proposal would immediately give moderate income homeowners a guarantee that they would not be thrown out of the street because they cannot meet the terms of a predatory mortgage. It accomplishes this goal without requiring any elaborate new bureaucracy and without requiring a single dollar from the taxpayers. And this plan does not bail out the bankers, hedge funds, and other financial industry types who were speculating in mortgage debt.
Here’s how the plan works. Currently, if a homeowner is not able to make their mortgage payments, the holder of the mortgage can go to court to place the house in foreclosure. This means that if the homeowner is not able to come up with back payments on the mortgage, or work out an acceptable arrangement with the mortgage holder, the bank or financial institution that holds the mortgage retakes ownership of the house and can have the homeowner evicted.
Under this security of housing proposal, the foreclosure process would be changed so that the current homeowner would have the option to remain in their house as a renter paying the fair market rent. If a homeowner chose to go this route, the judge in the foreclosure proceeding would appoint an independent appraiser to determine the fair market rent for the house, in the same way that a bank hires an appraiser to determine the value of the house before issuing a mortgage.
The former homeowner could then remain in their home as a renter for as long as they liked. The rent would be adjusted at regular intervals in step with the change of other rents in the area. There could even be an appeal process in which either party could request that the judge get a second appraisal, at the expense of the person complaining about the original appraisal. This should ensure that the rent set for the house is fair. After the foreclosure, the mortgage holder would now own the house and be free to sell it to another person, but the former homeowner would still have the right to remain as a renter, regardless of who owned the house.
This program could be restricted to homes that cost less than the median house price for an area to ensure that high income homeowners do not take advantage of it. The program would also only apply to people who lived in their homes, not investors. In short, it is a very simple and low cost way to help moderate income homebuyers. It does not give them any windfalls, but it can ensure that they don’t end up being thrown out on the street.
In contrast, the politicians are lining up with plans that ostensibly protect homeowners, but would most immediately benefit the mortgage holders who speculated in predatory mortgage debt. For example, one popular proposal being circulated in Congress would vastly expand the role Fannie Mae and Freddie Mac, the government created mortgage intermediaries, in the mortgage market. This proposal would allow them to buy up hundreds of billions of dollars of subprime and other mortgages that the private sector does not want.
Of course, the private sector doesn’t want these non-prime mortgages because the default rate is soaring. If Fannie Mae and Freddie Mac suddenly got in the market for this debt, those who are currently speculating in these mortgages stand to make a fortune. It’s not clear that the government’s largesse will necessarily benefit moderate income homeowners facing foreclosure, but there is certainly a possibility that some of the windfall will trickle down.
The point here is simple. We can design a mechanism that will directly benefit millions of moderate income homeowners who are struggling to hang on to their homes. Or, we can come up with schemes that will benefit the banks and hedge funds who speculated in mortgage debt. Place your bets.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues. You can find it at the American Prospect’s web site.
I disagree no one forced these people to sign the contract for sub-prime loans. I’m for more regulation of the industry instead but not bailouts for bankers or borrowers. Subprime mortgages caused inflated housing for everyone and priced a lot of people out of the market my husband and myself included. Some of us purposely chose to stay on the sidelines renting rather then purchasing housing we could not afford.
From www.patrick.net see below:
Stop the Subprime Bailout
Can you spare a few thousand dollars to pay somebody else’s mortgage?
Congress thinks you can, especially senators Christopher Dodd and Hillary Clinton. What’s more, a lot of the people you’re being asked to bail out lied on their loan applications or signed up for loans without reading the terms.
Here’s what’s going on, as explained by Caroline Baum of Bloomberg.com:
During the housing boom of the last five years, people with bad credit histories, many of whom lied about their income and nature of employment, got mortgage loans they weren’t qualified for to buy houses they couldn’t afford. Now that house prices have stopped rising, and the house can’t be refinanced or sold at a profit, Congress wants the taxpayer to subsidize the mortgages so these folks can remain in their unaffordable houses.
The proposal to bail out subprime borrowers may seem humane, but it’s wrong. The argument is that borrowers who signed up for subprime loans had no idea what they were doing. They didn’t understand the loan documents, or didn’t read them. Some borrowers may have been victims of predatory lenders (whose stocks have already surged on talk of a bailout). But many more borrowers simply gambled on risky loans in hopes of flipping property for big profits, or knowingly lied about their income just to get a bigger house. Don’t reward these irresponsible people with property, paid for by you and me!
Politicians will exploit your emotions by saying they want to help people “keep their homes”. But remember that the people in financial trouble already had houses. They got into this mess by trying to buy bigger and fancier houses than they could afford. If we do help them, it should involve them moving back into houses they can afford. No one will be out on the street. Anyone who could pay a mortgage can pay rent, which is much less.
How about requiring bailout participants to prove that they did not lie on their loan applications? We could start by reporting undocumented “stated income” from loan applications to the IRS.
Will the special aid package be indefinite? Can I go tomorrow and get a loan for a house I can’t afford, and then in two years when the rates reset, will I also be eligible for free mortgage payments? Should speculators get preference above citizens who have been saving rather than borrowing? What message does that send about responsibility?
The proposed bailout is a moral hazard. It encourages the bad behavior that got us into this mess, because the punishment for foolish borrowing is applied to you and not to the people who made the bad decisions.
Bailing out borrowers also means bailing out their lenders. If lenders have to foreclose, then they have to sell the house for less than the loan amount, and this means an actual loss to the lenders. That threat of loss gives lenders a motive to help borrowers by restructuring the loans, maybe extending the time to repay. On the other hand, using our tax dollars to keep people in houses they cannot afford would be “socializing” lenders’ losses, meaning taxpayers like you and me would be paying the bill and guaranteeing the profits of predatory lenders.
Under proposed bailouts, responsible people lose and have to give their money to gamblers, liars, and sleazy lenders. This is privatizing profits and socializing losses. It doesn’t matter if you have been dutifully paying your monthly fixed-rate mortgage. It doesn’t matter if you bought a smaller house based on what you could truly afford. And it doesn’t matter if you’re a renter who chose not to jump into the housing mania. Congress is proposing to make it your job to pay up for others’ irresponsibility. Why don’t they just tax you to cover Las Vegas gamblers’ losses as well? That’s pretty much what they’re proposing.
But it’s not too late. You can contact your representatives and ask them to stop this foolishness. Tell them to let the market correct itself. Tell them that it’s okay for people to rent instead of owning. Tell them to punish predatory lenders, but not to punish you and me for things the lenders and borrowers did. Tell other people about this page and ask them to write their representatives too. Write the editorial page of your newspaper.
Discuss with other readers. Mail p@patrick.net if you have suggestions for changing this page.
Sen. Christopher Dodd (D-Conn) has said that Congress must consider providing aid to about 2.2 million subprime-mortgage borrowers who are at risk of defaulting and losing their homes (Bloomberg). Dodd is running for President in 2008. Call his office at (202) 224-2823.
Sen. Hillary Clinton (D-NY) has called for a ‘foreclosure time out’ and for raising FHA loan limits to help more low-income home buyers (Reuters). Clinton is running for President in 2008. Call her office at (202) 224-4451. If you can’t get through, leave a message.
Thank you Mr. Baker for continuing, along with a few other economists, to write about this crisis in terms that can be understood, and break the intelligentsia’s grip on economic analysis, bringing it to the “insubstantial people”.
The twisted financial mechanisms that people like the mortgage hedge-funders have devised to satiate their greed are sometimes confusing on the surface. We need to understand what is going on to make good policy decisions.
Even Donald Trump has called what has been done by these “captains” of the financial industry in the subprime mortgage market an example of acts by greedy people. Now you know it’s got to be bad!
By the way the Bankers, Home Builders and Realtors were some of the top fundraisers for Congress. No wonder we are in this mess! Don’t let Congress do a bailout they’ll only help their funders.
Top PACs for: 2005-2006
ALL | DEMS | REPUBS
PAC Name Total Amount
National Assn of Realtors $3,752,005
National Beer Wholesalers Assn $2,946,500
National Assn of Home Builders $2,900,000
National Auto Dealers Assn $2,821,600
Intl Brotherhood of Electrical Workers $2,796,875
Operating Engineers Union $2,784,435
American Bankers Assn $2,748,299
Laborers Union $2,687,150
American Assn for Justice $2,558,000
Credit Union National Assn $2,412,853
See Top 20 list
Who made a killing on sub-prime loans in the first place? The overwhelming impetus for inventing “creative financing” was the FIRE sector of the US economy: Finance, Insurance, and Real Estate. Real estate values and prices couldn’t increase unless there were more buyers than sellers. More buyers couldn’t be created until new ways of financing mortgages were created. Eureka! Creative financing meant finding a way for people to pay more for their new home than they could actually afford, and lull them into thinking it would all be OK in the end.
So who benefited? Real estate brokers made more commission income on higher-priced homes; banks and mortgage companies made more interest income on higher loan amounts; insurance companies made more premium income on over 80% mortgage balances.
Who lost? The hapless buyers who couldn’t understand their convoluted disclosure statements, and didn’t realized that they wouldn’t be able to make the hugely inflated payments after the teaser-rate expired. The market is collapsing, they can’t make their payments, they can’t refinance because of decreasing property values, and they lose whatever equity and down-payment they thought they had. They give up.
Who doesn’t have to give up anything? The brokers and agents get to keep their commissions. The banks get to keep the interest they earned. The insurance companies get to keep the insurance premiums.
It ain’t rocket science.
dcbeltway:
As Dean Baker and others have written elsewhere, “regulators” like Alan Greenspan, were asleep at the switch with both the stock bubble and the housing market bubble… the switch being that one that protects all Americans, not just the top 1%. If you had people like David Lereah, the chief economist of the National Association of Realtors, writing books like, “Why the Real Estate Boom Will Not Bust and How You Can Profit From It” and the mass media lapping it up, who should really be held accountable first? To throw our fellow Americans out on the street because they weren’t as smart as you seems to put the onus on the easy targets once again.
Any bailout will only justify the criminal deregulation of that industry, proving that crime does pay.
There should be NO BAILOUT for ANYONE. If we think the situation is wrong, terrible, that real estate is criminally inflated, etc. then REGULATE THE BANKS ACCORDINGLY. If actual crimes were committed, follow the money trail, and pull it out of someone’s hide.
Turning people into perpetual renters? Holy crap… This really is starting to read like a great rollback of American civilization from its heyday of the 1862 Homestead Act to landless serfdom.
The real estate market must come back down to reality, and we need to put an end to usury. A bailout isn’t going to make that happen. On the contrary, it’ll only encourage more of the same.
First I would like to address the people who continue to blame “poor people” “Sub-Prime people” ” Bad Credit people” For this huge problem that we have.
I worked in the mortgage business for 5 years and quit for these exact reasons.
1.) We are paid to deceive. We use trick wording, over explain, under explain, hide, and double talk. What ever it takes. And who better to get over on then people who would do anything to own a home? Its like talking to a lawyer, unless you study law, you have no idea what the hell they are talking about. And don’t lie and say you do. Cause I will email you may last Mid-term for several of my law classes and I bet you would fail.
2.) It takes 5 “Sub-Prime” Borrowers to equal 1 investor who thought he could “Flip” homes.
Explanation:
5 people “Stated Income” borrowing 100%LTV of 150K = 750K.
1 investor “Stated Income” borrows 100%LTV 750K to buy 5 homes to “Flip” For profit.
Interest Rates at one time were 8-10% for “Sub Prime” “Stated Income” on 30 year fixed, at 100%LTV.
What happens is you come in to the office (Sub Prime) and this is what you are told.
Loan Officer
“Hello there sir, look you can borrow 150k for your home but with rates are pretty high and your payment is looking to be around 750 plus taxes and insurance.”
Customer
“Well that’s more than I can afford right now. What are the rates and why are they so high?”
L.O
“Let’s not talk rates, that’s not the problem here. If I told you I could give you a rate of 1% but you payment was still $750, you wouldn’t take it right?” “You don’t have the best credit history but that shouldn’t stop you from getting a home.” Do you know if you want to stay in this one place for 30 years that’s quite a commitment”
Customer
“Well I’m not sure?”
L.O
“I want you to have this home” What if we get your payments around 500 could you swing that”
Customer
“Yes that would be great”
L.O
“We will get you a 2 year fixed instead of 30 so you can decide if you really want to stay in this neighborhood.”
Customer
“What happens after 2 years?”
L.O.
“If you like the place you stay, and Refi.” If not then we can get you a new place to live. You will have a lot more freedom. You won’t be tied down to a mortgage that you might not be able to afford.”
Ok no here is the problem. L.O’s make front end points on the rate. They don’t tell you that. If you say you will pay 500 that are great. Because now we can get the rate as low as possible. Say 4.25% with a payment of 350 plus Taxes and Issuance. But in turn the rate is marked up to a higher rate to get the payment to 500 which it has been said that you will take.
On top of that Broker fees and all other fees to get that “Fat” commission. If you complain, they just say oh it’s over 30years its not upfront payment. It’s in the loan.
So you sign the many dotted lines and you’re the proud new owner of a home.
The bad news:
2 years go buy, and you get a letter in the mail that says your rate has adj. to prime and now your payment has gone from 500 to 875!!!!
So now you must refi, and good luck cause you cant get in touch with the L.O and applying for a new loan is not working so well cause millions of people every were are doing the same thing.
Mean while you are getting more and more behind on your mortgage.
Paul Bramscher:
I agree that the deregulation was criminal and that they need to be “regulated accordingly”. Now that there are victims of that crime, if we believe ourselves to be part of a healthy community (or working toward it) we must compensate the victims in some way.
How about we eliminate the concept of non-stated mortgages? I know, it’s simplistic, but it would be effective. Granted it would prove an impediment to certain segments of the home buyer sector but at least the potential for abuse, by all parties involved, would be heavily mitigated.
I wonder how much of the change in our investment mentality, lo these last several decades, is to blame for our economic woes? Short-term thinking and planning, while having their appropriate place, is no substitute for a long-term measured approach. In point of fact, this holds generally true in every aspect of human life. It may be cliche and an old axiom, but there is a truth in the concept of “sleeping” on an important decision.
But hey, why think of the future prices to be paid when a quick buck can be made now? It’s not like we are going to have to pay. Besides, our children will find some way to pay the piper, right?
Continued:
While getting behind you at some point will come to foreclosure and your life and credit history have now come to a screeching halt.
The Investors who are in the same situation made the same mistakes and they know the business. The problem is, THEY COULDNT SELL THE DAMN HOUSES. Then those interest only payments they were milking so they could be real-estate kings?!?!?
Now they went from a few hundred dollars per home to regular mortgage payments. Well 2000 total for 5 homes wasn’t too bad for a young go getter. But 3750 is starting to cut into your new suit fund. Throw in the fact that now you can’t even sell the houses at market value. Looks like you’re in hot water.
And then there is the biggie. Those Balloon loans!!! Got to love those!!!!!
Super Show off money makers all want to have that million dollar home. And unless you’re super rich it’s tough to get. Cause kind of rich isn’t going to cut it.
But a balloon loan lets you get the joy of having and Uber home with a modest payment.
OH WAIT. When the balloon busts do you payments go up. Oh no. Even worse the WHOLE LOAN IS DUE. Every LAST PENNY!!! No more payments buddy.
But no fear, you can just Refi, or wait that’s not going so good is it.
Option ARMS are even better. For those people in Florida who have super human appreciation. It was like +40% at one time.
You can pick when you want. 500 negative Amortization payment. This means that you pay less then the interest accrued. Which sounds stupid unless your home damn near doubles in value every year.
1000 payment, which is Interest only. Again doesn’t hurt.
1700 which is your principle plus Interest. (This is what most people pay)
Or 3400, which pays your home in 15years instead of 30.
So these are just some of the tricky ways L.O’s get paid big bucks at the expense of others.
A little confusing huh?
Yeah I thought so.
~Future~
Future.me:
Thanks for the testimony. To me, you are among the heroes in America. In a society that so strongly encourages monetary gain, it is unusual to hear of someone who has foregone personal gain as a matter of conscience. I know that there are many out there that make these types of decisions, but it is unfortunate that they aren’t the ones sailing in the Annual Hedge Fund Regatta!
These sub prime borrowers are seen as the dregs of the earth that never should have owned a home in the first place. The lenders just pumped it up with phony baloney loans to get the points and fees. Everyone else is left holding the bag and the real estate people have nice fat bank accounts. You will not get any sympathy for the lenders, the core principle is self reliance, swim at your own risk.
I’m not for throwing anyone out on the streets–did you read my post from Patrick.net? I’m just not for using my tax dollars to bail anyone out from borrowers to bankers. Its simply not fair to those of us who waited on the sidelines, rented, saved up, and refused to buy things we could not afford. You don’t think I don’t want a house? I’d love a house but cannot afford 3,000-4,000 a month to afford one which is what it would cost in Northern VA. I don’t have the income for it and I did not want to get caught in a subprime trap. I was also not a flipper and many of these people were flipping houses and making a killing pricing so many of us out of the market. Why on earth should I bail those people out??? I agree the regulators were worse then asleep at the wheel–lose lending practices caused this and so did the Federal Reserve which lowered rates. I am 100% behind abolishing the Federal Reserve it would be the end of the boom and bust cycles within the ecomomy which would be a good thing.
The sub-prime mortgage problem is a consumer protection issue.
A one-time bailout of the most egregiously exploited consumers followed by implementation of controls on the mortgage industry seems to be appropriate.
dcbeltway:
Man this crap bothers me, PLEASE Stop assuming that everyone who has financial trouble, somehow bit off more than they could chew.
Because I don’t know about you, but the average American, is one broken leg, one bad case of the Flu, one car wreck, dead loved one, one sick child, cancer diagnosis, stolen identity, bad investment, or happen to work for a Plant or Company that has now closed situation away from loosing everything.
So don’t come on this site on a high horse thinking that some Hurricane, earthquake, or random act of Nature/God/(Insert belief) can’t change someone’s life. Cause sure if you happen to be a super upper middle class white male, who is doing so well. Get a bad case of “THE CANCER” and look out. There went your so wonderful life. Cause you got a 91.5% chance that your; what you thought was great insurance won’t be covering that cause of (Insert Reason) or (Insert quote from SiCKO).
So I’m not trying to rain down on you, but I have to let people know that you may have made $123,250 as a family in one year. But if your wife, or Husband can’t work anymore cause of (Insert Reason)????
And you happen to fall on hard times!?! I wouldn’t want to be in a world where a bunch of people like you are, people that don’t want to help out a fellow Human (Screw being a fellow American) I don’t believe in that God Bless America Fuck the rest of the world BS.
Sorry for the F’Word.
~Future~
Yes some people fell on hard times very true. I do feel sorry for these people as they did get screwed over. However, there were plenty of people willing to flip houses and make a killing in the market. Back in 2003, 2004, and 2005 everyone was getting rich off of the real estate ponzi scheme and some people jumped in late and are now holding the bag and they want bailouts. I am not for bailing out flippers and speculators.
dcbeltway:
Point well made. I agree indeed. Good to debate with you
dean baker, dean baker. so naive. who could have foreseen this disaster in the making? alan greenspan didn’t, so who could have? (oh, right. d baker did, a long time ago
isn’t this just the working of the market, and how will people learn market discipline, and how can we have the best of all possible worlds if we tinker w/the market by changing owners to renters?
gawd, i need a cigarette after this crap. i think baker would say that this was a great swindle, a bubble deliberately stoked by greenspan, like the dot.com and dollar bubble before.
except here, the real wealth (property) of people will be transferred to banks, et al, unlike the movements of paper wealth in the previous bubbles.
i like him trying to come up w/a idea to cushion the blow for the average jane or joe, but all of us know, it’ll never be so.
“This proposal would allow them to buy up hundreds of billions of dollars of subprime and other mortgages that the private sector does not want.”
I’m confused - aren’t we broke and, like, hundreds of billions in debt already? So the plan is to just print more money and exchange it with the bank robbers’ ill-gotten gains, because the dye pack went off?
Good thing Obama and Hillary are raking in that Wall Street juice to insure they’ll do the right thing by “we the little screwed people.”
jedediah zachariah jedediah agreed. The banks own everything in this country. They own the houses the cars and much of everyone’s property. I know very few people who own their homes free and clear and alot of people paying off car loans. Even then we all still owe taxes on those cars and homes.
This plan would not work for me. My mortgage is not sub-prime, but the fair market rental value would be higher than the mortgage payments.
After my employer (the federal government) reneged on their promise of continued insurance coverage, after I retired, my wife had to get $500+ per month private insurance. She then contracted breast cancer and the insurance didn’t cover some very expensive drugs.
The next thing I knew she had acquired a debt of 30k, so I have now become our financial manager, with the intention of avoiding foreclosure or bankruptcy.
It is a challenge to try to live on a $200 monthly pension, a $100 per month annuity and Social Security, but it keeps one alert.
I say, let the “Free Market” take it’s course. Oops, wait a minute… there is NO “Free Market” - Never was. C’mon people, nothing shows the Chimera of this “bedrock principle” of rampaging predatory Capitalism any better than this particular issue does. It is complex, with the tentacles of many ‘Industries’ involved from Banking to Real Estate, to Insurance, to Home Builders, and many more. “Privatizing profits and Socializing losses” IS the System !!! Wake Up.
Same principle for every other Capitalist Venture. The Profits ARE the Rape of the Earth, the Exploitation of People, and the total Corruption of the Political Process. It’s time for a Change… Republicans & Democrats, you’d better start running, we’re coming after you. We’re going to get our Land, our Money, and our Country back !
srelf: The problem with the Democratic liberal solution, though, is the good/bad crook arrangement it has fostered with the Rethugs since the S&L collapse. One side deregulates and screws the country over, the other side bails out — thus proving that crime does, indeed, pay. If there were victims and not just foolish consumers — then do this:
(1) Reregulate.
(2) Jail the politicians who deregulated.
(3) Follow the money trail — it doesn’t simply evaporate it — start a class action lawsuit e.g. US v. [insert a mortgage company here] and get the money back to the victims.
I’ve done the math. Monthly amortization hides the fact that a 30 year mortgage is nothing short of complete usury. Until we can get a handle on a run amok lending industry and grossly over-inflated costs of putting a roof over one’s head, a bailout would be like handing a bottle of vodka to a culture whose elite are drunk with lending.
jedediah zachariah jedediah springfield August 20th, 2007 5:01 pm
“dean baker, dean baker. so naive. who could have foreseen this disaster in the making? alan greenspan didn’t, so who could have?”
I suspect that Alan Guru Greenspan (”I worry incessantly that I might be too clear”) saw far more than he let on.
“Artificially low interest rates coupled with financial deregulation and central bank money-printing (courtesy Alan Greenspan) has led to the sub-prime debacle that now threatens to undermine many of the 6 million homes bought by Americans who borrowed close to 100% (in some cases 105%) of the purchase price.”
Greenspan’s message was loud and clear to those of us who worked in Real Estate during the 1980’s Savings & Loan Scandal and in the 2000’s Sub-prime Loan Scandal. It doesn’t take a f**king genius to figure out that people who can barely squeeze by with their initial rate are NOT going to be able to pay a higher rate when the adjustment kicks-in a year or two down the road, especially when wages are NOT keeping up with inflation and jobs are continually being outsourced.
“Krugman, an economist, believes that the current real-estate bubble was “both caused and was fed by widespread malfeasance.”
I totally agree with Krugman.
Low interest rates?
Check out an online amortization calculator. One that gives the complete picture — total interest paid on the amount of the loan, over a 30 year period for instance: http://ray.met.fsu.edu/~bret/amortize.html
Let’s say a median home is $300K in your area. You manage to save $30K for a downpayment and borrow $270K @ 6.25%. Over 30 years you’ll have paid close to $600K, almost 122% interest.
Now if you wanted to keep your actual interest at 6.25% as a percentage of the principal, that means you shouldn’t pay more than ($270,000 * 1.0625) = $286875. To do that, you’d need to pay your 30 year fixed off in about 23 months @ approx. $12,500/month.
We have run amok lending in our society, eventually driving everyone to serf status. The problem is that it does not good to be a lone wolf seeing a problem here — in a culture of people drunk on borrowing and lending, there’s no cheap place to live and get equity. All has been speculated, flipped, foreclosed, or racketed. And it needs bailing out?
I beg to differ. It needs a fairly widespread clamping down on usury, speculation, and racketeering.
Paul Bramscher August 20th, 2007 8:01 pm
“We have run amok lending in our society, eventually driving everyone to serf status. And it needs bailing out?
I beg to differ. It needs a fairly widespread clamping down on usury, speculation, and racketeering.”
The FEW have used too many, for far TOO LONG!
yo paul:
to be fair
one must consider
the tax side
should we be lucky
and have an occupation..
ken
Many of the loans were designed to fail. The banks that made loans without due diligence should be required to make the borrowers whole and re-evaluate the application with actual income and the lowest interest rate on a 30 year mortgage offered in the last 5 years with no fees at the honest value of the home.
If the banks, brokers and other crooks in this game were forced to do this and the industry was properly regulated there would not be devastating crashes in the crucial housing market.
You can’t just blame the borrower when the banks had phony paperwork and magic values assigned to the houses by corrupt brokers and appraisers.
Paul Bramscher
re:
“Let’s say a median home is $300K in your area. You manage to save $30K for a downpayment and borrow $270K @ 6.25%. Over 30 years you’ll have paid close to $600K, almost 122% interest.”
I agree with you that there is a problem with ursary in North America. One needs only look at credit card rates and what they charge us on loans if they find some/any excuse to do so. Often there is quite a large spread between what banks pay us when we lend them money and what we pay them to borrow it.
However with long term loans such as for a house it is reasonable for the lender to expect some compensation for the change in the value of the money over time. In 30 years from now $1000 will almost certainly buy far less than it does today. I do not begrudge the lender adding interest to compensate for the change in value of the dollar. Many do get rather greedy. Personally I would be quite happy to get 6.25% on a loan.
What this country needs is legislation mandating guaranteed housing like truly civilized countries have. Anyone who isn’t rich in america is forced to live such a disgusting, degrading life and it isn’t necessary! You shouldn’t have to pay three times the actual cost of the home you purchased (or have you’re children inherit that debt after your dead, more likely.) The mortgage industry needs to go; college should be free and homeowner loans should be setup like federal student loans are today.
http://www.dreamingearth.net
From what I understand of what Dean said, basically your house becomes an apartment with instead of one making morgtage payments, ones paying rent. Just sounds screwy
RandB:
Automobiles actually decrease in value, the moment they are driven off the lot, and yet the same problem exists there too (though to a much smaller degree).
In any case, I’m unsure that constant devaluing of a currency is the overall norm — with the exception of depressions, wars, famine, etc. What causes the dollar to have less buying power as time goes on? Will it ever stop its downward spiral, or will it eventually be worthless?
The system is being gamed. Lenders view homes as investments, whereas a roof over one’s head is a biological necessity. The ability to generate some equity, however small, is a basic feature of any modern economy which, ostensibly, separates us from serfdom, slavery or tyranny.
I’m at the point where I don’t really see what justification the banks have for “owning” any real estate whatsoever. Are they its best ecological stewards? The best sustainable farmers? The most law-abiding or ethical people around? Local to the bioregion in which the land rests? The only justifications they have are the legal system, which is currently not running on all cylinders anyway, and the ability to summon socialized law enforcement to get people forcibly evicted (ala Grapes of Wrath).
We’re descending toward a feudal/warlord arrangement.
The genius of today’s “debtors’ prisons” is that they require almost no rent or upkeep… the system has people indentured in an invisible way, and the mortgage tether is so presumed as an accoutrement of modern life that it’s barely challenged. When I did the math (PAUL) on my Key West townhouse and reasoned it probably would NOT BE standing in 30 years (whether due to hurricane or global warming and seas rising) that factored into my decision to sell it…
I have always liked reading articles from Dean Baker, but turning these people into renters is just downright insane!
I believe in the free markets. When someone interferes with the markets in any way; someone always gets burned. Take for example, the “Bernanke Put” as Nouriel Roubini refers to it
The same principles apply to the housing market. Many people such as myself have waited out the market by renting because we knew real estate was incredibly overvalued and was sure to crash; by renting and waiting the market out, it was essentially buying a put option against housing. Bailing out the “loan owner” is interfering with those puts.
Most of these people who “bought” a house put nothing down or close to it; they can just walk away! Sure, their credit will be destroyed ; no different than if they were bailed out (many didn’t even have good credit to begin with); and they will probably get hit with a nasty tax bill, but the house is going to fall in value anyway, so holding on to it will be more costly. Their total loss will probably not be much more than money they would have paid in rent had they not “bought” the house in the first place. Let the lenders take the hit that they were begging for! These people can just go back to renting; they are not homeless any more than us bubble-sitters that are renting right now aren’t.
Everybody made their calls or puts here:
Lenders made their call that they could lend huge amounts of money to people who have a notable history of not paying back and profit greatly from it.
Borrowers made their call that house prices would keep going up; or in some cases, the people didn’t understand the mortgages and didn’t have enough common sense to go to a financial advisor (their fault).
We bubble-sitters made the put that housing at one point or another was going to crash.
We won this bet! Leave the damn markets alone! We all learn from our mistakes; let the learning process begin.