Here's how we should have spent the bailout money
Real Estate Investor · Mountain View, CA · Member since 2008 · 53 posts · 6 votes
Maybe I'm naive but here's how I think we should have spent the first bundle of bailout money.
1) Take a look at each loan in Foreclosure and see what could be done to get them out of that state. (buy down interest rates, make back payments).
2) For every loan that goes into NOD - see if the interest rate can be bought down so that the owner could keep their payment affordable. Maybe they're still under water but at least they can afford to live in their home.
This way the banks get their money and gets to stay in business and people get to keep their homes.
Let's hear some feedback. I know I'm missing soemthing (possibly magnitude of the debt?? but $800 billion seems like a big number)
I can't see why the government would do anything about losses incurred by investors, any more than they make up for stock investors' losses. So, IMHO, NOO loans shouldn't get any such treatment.
If someone bought a house with a pay option ARM with a teaser rate, and could only qualify based on the minimum payment, then they are living beyond their means. Why should they get bailed out when someone else in a similar economic position bought a house they could afford and used a 30 year fixed rate loan? Or, just realized they couldn't afford to buy and rented?
Some folks who are hurting now are hurting because they HELOC'ed and refi'ed all the cash out of the house. Had they stayed on their original payment schedule, they would be able to afford their house. Instead, they used it as an ATM. Which is really to say, they already sold it, they just didn't give up possession. Why should they get that debt removed? They took that money and spent it.
Others are just unhappy that the value of the house is less than what they owe. If they want to stay in the house, and can afford the payment, why does this matter? It happens every time someone buys a new car.
Now, I can see that some mechanism to help people who made these bad financial decisions may be needed. Some form of debt forgiveness without the phantom taxation so they can move on with their live and not be forever saddled with a debt they can't ever escape.
Or, perhaps some sort of principal and rate reduction for people who can afford the new terms and remain in their houses. That would come with a price, though. For instance, the forgiven debt would be carried forward as a reduction in their basis on the house. It could be reduced by 10% every year. So, if they sell immediately after getting the principle reduction, or the equivalent principle reduction for a rate reduction, they would have to pay capital gains tax on the amount of the reduction. After 10 years, that goes away.
Honestly, I think some people are just into houses they just can't afford. Why should everyone who's paying for a house they can afford, either with their rent or their mortgage payment, be taxed to subsidize the people living in ones they can't afford?
Housing, IMHO, is only one small piece of the puzzle here. Prices were driven up a pace never before seen. That happened because of an abundance of easy money. Prices MUST adjust to a more reasonable level. The bigger problem is that our entire economy was inflated like a bubble by the abundance of easy money. The car makers have the exact same problem. Demand for cars increased, too. Because its easy to build more cars than more houses (though heaven knows the builders tried), prices remained relatively flat, but production ramped up. Now the car makers are feeling the very painful effects of having to scale back production very quickly to meet the lower demand level.
I believe the same situation is true for many sectors of the economy. The easy money created a lot of growth. Unfortunately, that growth was false. Now we have to suffer the effects of unwinding that false growth before we can resume a more normal growth curve.
Jon,
I agree with most of what you say. The problem is there are people who should have some help because they got bad advice. Ideally the people who made money on giving this advice should be the ones paying to bail them out.
There are a lot of plans and ideas floating around and none of them are the ideal solution. I don't believe there really is one.
If the banks want to bail them out thats their business. The money the banks get from the government should cost the banks so that it isn't us who are really bailing them out.
donrock
I believe that there is a ideal solution. That solution is to let the free market work. Let deadbeats fail and let banks that are insolvent fail. Contrary to all the nonsense, NO ONE is too big to fail. If a big bank fails, several small banks could take over their business. Let the foreclosures flow. Investors will buy those houses and rent them to the failed homeowners (most of whom should have been renters all the while).
Listening to bad advice is not a reason that I (and other taxpayers) should bail out these people. Why should I be punished because other people acted irresponsibly?
Mike
People got bad advice from brokerage firms telling them to put their money in stocks and keep it there even as they were approaching retirement. The S&P is off 47% from its Oct 2007 peak. Even a "target retirement fund, e.g., T.Rowe Price 2010, is 30% off its peak. If you were planning a retirement and looking at your nest egg in mid 2007, and were looking at it now, you'd be looking another five years of work to make back that one third drop. Should those people be helped out?
What about all the people who invested with Bernie Madoff? Should the federal government (i.e., you and me) pay them back the $50B he stole? That's $166 a piece, for every man woman an child in the US.
What about the college student who was given a credit card despite having no source of income, and no real training about the implications of spending that money? Should we pay off their debts?
I truly do sympathize for people who needed to buy a house in the first half of this decade in one of these boom areas. Who bought a house with a reasonable down payment, and are making their payments, but are now stuck in a house they can't unload.
I don't have that much sympathy for the people who got caught up in the hysteria that houses could appreciate at 10% per year forever. Who bought a house the couldn't afford with a nutty loan and a promise they would refi before the payment skyrocketed. Look, that makes absolutely ZERO sense. Even if it works for a few years, you are GUARANTEED to lose that house at some point, even if prices to continue to rise. Enjoy it for the time when you have it, take your lumps and move on when the train wreck eventually occurs. To think these people somehow deserve to be bailed out and allowed to stay in those houses is ludicrous.
If we want to fundamentally stop this problem, we need to put proper financial education into our school system. Maybe kids learn a little something about interest and credit in a math class. But they learn socialization and other skills everywhere along the way. Make financial education just as much a part of the process, and start it in Kindergarten. Establish the same sort of DTI limits for cars and credit cards as for home loans. E.g., require gross income 10X the proposed car payment. Limit total available credit card debt to 25% of the gross income. Totally eliminiate car leases except for businesses, and make the lessee PROVE on their tax return the vehicle was used exclusively for business. In one of my former jobs where people had company cars, even stopping to pick up your child from school was grounds for taking away the car.
Bottom line: live within our means.
If we want to fundamentally stop this problem, we need to put proper financial education into our school system.
How about to the lending institutions that decided it was a good idea to give 100% financing to people with terrible credit, that could not even pay their phone bill on time, with a loan that would adjust after 2 years, and were already paying over 50% of their gross income to their mortgage?
I don't want to bail them out either.