Why should taxpayers have to bailout irresponsible homeowners?

The Coffee Shop
1

So GW is going to outline his plan today to “bailout” people who are in danger of losing their homes. Aside from the cases where clear fraud has transpired–forging documents, etc.–what reasonable basis is there for using our tax dollars to bailout irresponsbile homebuyers.

People talk in generalisms about how low-income and first time homebuyers were “caught up in the sub-prime mess”, and lured in with “teaser rates” and other nefarious instruments. Isn’t the burden of having to understand the contract your entering into on the buyer?

And if that buyer is financially illilterate to the point that they don’t understand the difference between the concept of a “fixed” or “variable” rate mortgage, would’nt the common sensical thing to do be to find someone who does–such as a family friend or a well regarded lawyer in the community?

Now, I do feel bad for someone that is losing their home–for whatever reason–but I just don’t want to pay for it. Yet, the bailouts continue, reinforcing more reckless behavior in the future. The government does this incessantly, bailing out people in flood zones, year after soggy year, funding the rebuilding of homes and infrastructure in hurricane prone geographies that should be deemed uninhabitable–over and over and over the bailouts come like clock work.

I wish I could of got a nice fat government check when the internet related protion of my portfolio went south back in 2000, that would of been sweet!

Maybe just once Uncle Sam should just give the knuckleheads out there a big kick in the nuts by refusing to fund their irresponsible decisions with our tax dollars.

2

I agree 100%. When I bought my home, I spent less than the bank said I could, took out a 30-year fixed so I knew exactly what I was getting into, etc. In short, I was responsible. We need to let these mortgages and these people fail so they will learn from their mistakes. I guess that sounds cold but I see no reason to pay for someone else’s reckless spending.

3

I agree. A bailout pisses me off. I got a 30-yr fixed, don’t go nuts w/ credit cards, and spend less than I bring in. My reward: bailing out someone who is too irresponsible and/or stupid to keep their home. Home ownership is for the responsible.

4

I will await details, but this doesn’t seem to be about bailing out homeowners but about bailing out lenders with bad paper that will now become good.

I will wait until I understand his proposals better, some of which sound good, but my immediate reaction is a pox on both their houses.

5

i don’t think FHA insurance is taxpayer financed, is it? isn’t it a government sponsored, but not funded, program? i think the FHA borrowers pay a insurance premium to fund it, and the more at-risk borrowers will pay a higher insurance rate. maybe this is a good idea, maybe not, but i don’t think it has anything to do with a taxpayer bailout.

6

How about instead of bailing out these homeowners, we spend a portion of that money on funding real world economic classes in middle school and grade school. Seriously we do next to nothing to prepare kids about money and “living within their means”, forget terms like compounded interest, retirement and sub-Prime.

We’d save this country a whole lot of heart ache if we would just edumicate people about finances in general. Oh and before I get “Isn’t that the parents job”, yeh right. We have a significant portion of parents today that can’t seem to figure out how to feed their kids before they send them to school. I think expecting them to teach them about buying a house is a stretch.

I still strongly believe that a lot of what we teach in school SHOULD be taught at home, it’s just not. Until we turn the parents around we, as a country, would be better served teaching the kids at school.

As far as current home owners, sorry, either read the fine print or hirer an attorney BEFORE you buy the house.

~Matt

8

It’s only an hour to wait for the statement but fun to speculate. CNN says the following:

“The president will discuss a number of initiatives and reforms intended to help homeowners with subprime mortgages keep their homes,” the official said. “He will also discuss reform efforts to prevent these kinds of problems from arising in the future.”

“Bush will direct Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson to team up to help troubled mortgage holders get the services and products they need to avoid defaulting on their loans, the official said.”

“He will also push Congress to pass Federal Housing Administration legislation that will give the agency more flexibility to assist mortgage holders with subprime loans, the official said.
The need for rigorous enforcement of predatory lending laws and stronger, more transparent lending practices are also on the agenda for the statement, the official said.”

“He will discuss his willingness to work with Congress in a bipartisan way on legislation to reform the tax code to help troubled borrowers rework their loans,” he said.

To me it sounds like a gov’t program to refi people’s homes off exotic arm/sub-prime/interest only loans onto traditional loans, one assumes the gov’t would pick up the tab (of course).

9

“To me it sounds like a gov’t program to refi people’s homes off exotic arm/sub-prime/interest only loans onto traditional loans, one assumes the gov’t would pick up the tab (of course).”

That was my initial take, but that may be cynicism born of old age. Let’s let it play out.

10

Concur, one main feature is supposed to be FHA back refi’s of ARMs etc. They have to be able to secure these refi’s so I’m not sure it’s totally a bail out, and I heard on the radio it was focussed on borrowers who were prey of predatory practices.

If they truly were duped by predatory lenders, then I don’t see it as a bail out. They were duped by people who were professionaly obligated to not lie to them. Calling it a bail out (if all this is true) is like saying it’s my fault I’m in a building that fell down, I should have researched the building design and known!

11

“He will discuss his willingness to work with Congress in a bipartisan way on legislation to reform the tax code to help troubled borrowers rework their loans,” he said.

To me it sounds like a gov’t program to refi people’s homes off exotic arm/sub-prime/interest only loans onto traditional loans, one assumes the gov’t would pick up the tab (of course).

This latter one appears to be a proposal to not tax loan amounts that are written off by lenders as is currently done, thereby making doing so less expensive for the lenders and assisting homeowners in refinancing rather than defaulting. Reduces tax revenues in the short run.

Don’t look for a bailout of the great unwashed anytime soon. Won’t happen. Who gets bailouts? Auto manufacturers, S&Ls, airlines. Don’t see lower income homeowners anywhere on that list.

12

I am totally against any changes like this in the tax code, well, unless I can tap into them. So, does that mean I can make a lot of money on my home, borrow it all, default on the loan, and never have to pay the capital gain tax? Sweet deal. I will never pay a cap gain tax again.

Compassionate conservatism? How about real conservatism? You bought the house you couldn’t afford, deal with the consequences.

13

I wonder if the president’s ratings are really low? Maybe he needs a distraction from the GOA and surge report.

14

How about instead of bailing out these homeowners, we spend a portion of that money on funding real world economic classes in middle school and grade school. Seriously we do next to nothing to prepare kids about money and “living within their means”, forget terms like compounded interest, retirement and sub-Prime.

You’d have to lead a serious grassroots effort to ever get that to happen. There’s no incentive for our government to do that. There’s too much money to be made off of irresponsible spending and borrowing. Why do you think its legal to jack up credit card rates (to 30%!!!) when you begin to lose the ability to pay them off any time soon.

I agree that we shouldn’t bail these people out, but I’ll contend that we need to both educate the masses and put some serious regulations on the lending industry.

…and then monkey’s will fly out of my ass.

15

i don’t think FHA insurance is taxpayer financed, is it? isn’t it a government sponsored, but not funded, program? i think the FHA borrowers pay a insurance premium to fund it, and the more at-risk borrowers will pay a higher insurance rate. maybe this is a good idea, maybe not, but i don’t think it has anything to do with a taxpayer bailout.

Your right, FHA is self funded, however, the extent of this mess and the sheer number of people in trouble inevitably you and I and everyone else will pay the piper on this one. Just look around, you already have states setting up “bailout funds” to help homeowners to try and refinance, who do you think is paying for those programs?

Look at LA, the city council has proposed setting up a $5M revolving fund to give “at risk” homeonwers loans up to $10k, again, who is paying for that? Its not the FHA, but the taxpayers.

16

**Look at LA, the city council has proposed setting up a $5M revolving fund to give “at risk” homeonwers loans up to $10k, again, who is paying for that? Its not the FHA, but the taxpayers. **

A 5MM revolver and 10M homeowner loans are really a drop in the bucket when you consider the consequences of not helping. Now I agree 100% that people should not have baought property they couldn’t afford, but these are unsophisticated borrowers who believed what they were told (ie that they could afford to buy). Irresponsible lending and shaky underwriting are to blame more than anything.

17

"I agree that we shouldn’t bail these people out, but I’ll contend that we need to both educate the masses and put some serious regulations on the lending industry. "

Two things here, regulating the industry wasn’t really the problem–mostly because its never truly effective in the long-run anyway. The regulatory dialectic always ensures that banks, lenders, and other financial institutions will find new ways to work within the “new regs” being proposed by regulators, no matter how tough or iron-clad they seem.

In fact, the plethora of new financing instruments we have seen introduced is a natural part of how the regulatory dialiectic plays itself out. New instruments and organizational structures allow for new ways to close the deal–all within the bounds of the regulations. Companies innovate, regulators respond, companies again innovate, and so on and so on, as the cycle repeats itself. Many times the new regulations create newer and even better opportunities for the very entities that are trying to be reigned in–the unintended results of the Glass-Steagall Act for example.

Thus, given that regulations have never really been effective in the banking arena, I think its better to focus on the first part of your statement, which is the education of consumers.

I’ve studied finance seriously for about 10+ years so you would think that I would be the last person that would need to get educated about homebuying. Accept for one small thing, I was a first time homebuyer at one point just like everyone else. In fact, before I bought about 2 years ago, I signed up for a first-time homeowners seminar provided by the city of Boston.

In this class there were a few other professionals, lots of sub-prime folks and everyone in between. Our instructor was a no-bullshit woman that put everything into simple terms, particularly when it came to signing on the dotted line and understanding what the hell your getting into. We went over the entire homebuying process soup to nuts. Even the non-english speakers new the deal. I learned a lot of practical advice in that class, even though I could do the mortgage math in my sleep. When it came time to buy I was fully prepared, as a responsible homeowner should be.

I don’t see any reason why a class like that–which was 25 hours of class time–should not be required of every person seeking a home loan. Maybe you could make it mandatory for just sub-prime or some credit score cuttoff.

18

Great post. How will you ever price risk anymore? When the government steps in there is never any risk. What needs to happen is a lot of borrowers need to dig in a figure out how to pay their debt (2nd job maybe?), some borrowers need to lose their house, some mortgage companies need to go away and some invetment firms need to take a hit. The whole thing will eventually shake out and hopefully a lot of people will learn a valuable lesson about risk.

19

I never could believe that investment firms were actually buying all this sub prime paper without paying a much larger risk premium than they were. I knew a few guys who worked in the sub prime area and it would make your hair stand on end as to what kind of crap was going on in orginating these loans. At 50 cents on the dollar this paper might have been a reasonable risk. Priced at just a fairly small premium above commercial grade, it was a disaster waiting to happen.

Hint to hedge funds and investment banks – don’t ever buy loan paper from originators who buy White Out by the case.

20

**Look at LA, the city council has proposed setting up a $5M revolving fund to give “at risk” homeonwers loans up to $10k, again, who is paying for that? Its not the FHA, but the taxpayers. **

** “A 5MM revolver and 10M homeowner loans are really a drop in the bucket when you consider the consequences of not helping.”**

The amount is irrelevant, its the principal underlying my original question that matters.

" Now I agree 100% that people should not have baought property they couldn’t afford, but these are unsophisticated borrowers who believed what they were told (ie that they could afford to buy)."

The fact that that is true only strengthens my argument, while weakening yours. To my earlier point, why would anyone who didn’t understand the homebuying process trust someone in such a blatant and obvious position of conflict–i.e., lenders, brokers, etc?

**“Irresponsible lending and shaky underwriting are to blame more than anything.” **

Wrong, in cases where clear fraud didn’t occur, it is the homeonwer that is soley responsible for buying the home. If I go into an antique shop and see something I like and the owner tells me it costs $100 bucks and I buy it only to find out later that its really worth $5 bucks, who is at fault? Don’t you think I should have known what I was buying, what type of deal I was entering into, the risks involved, etc? Same principle applies to this mess, accept when its a home the standard that you as buyer need to apply needs to and must be far greater, obviously.

Buying a home isn’t like buying a loaf of bread!

21

You make good points.

Two things here, regulating the industry wasn’t really the problem–mostly because its never truly effective in the long-run anyway. The regulatory dialectic always ensures that banks, lenders, and other financial institutions will find new ways to work within the “new regs” being proposed by regulators, no matter how tough or iron-clad they seem.

I agree with you more or less, but take for example the credit card industry. I at one time (while employed) I had enough credit at a high enough iterest rate to potentially be charged 1/3 of my take home income in interest alone. When I got the cards in my early 20s my rates were 14% and eventually dropped to 8.5%…until I carried a large enough balance, a recession hit, and I lost my job…then the rates shot up to 30%.

I’m sorry, but there’s no reason a credit card company should be allowed to charge 30%. If that’s not usery, then what is?

I don’t see any reason why a class like that–which was 25 hours of class time–should not be required of every person seeking a home loan. Maybe you could make it mandatory for just sub-prime or some credit score cuttoff.

I can think of a reaon. People will walk out of that class and decide not to buy a house. Those with the power ($$$) don’t want to ever see that happen.