'Too Much House' Buyers To Be Rewarded?

by: David Enke October 31, 2008    

David Enke

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The Treasury and FDIC are considering a plan to guarantee about $500 billion of bad mortgages in an attempt to reduce the total number of foreclosures, with an estimated cost of about $50 billion to be paid by the bailout package - i.e., you, Joe Taxpayer (see Bloomberg article). The plan would allow banks to restructure as many as 3 million loans into ones that homeowners would actually be able to afford (imagine that). In other words, the mortgages would be restructured based on a borrower's ability to repay, and not their ability to afford the home.

If homeowners also took out a home equity line of credit, no problem. The plan being considered would also cover these second mortgages as well. I guess that will teach those of you who recently bought a home within the last year or two and actually put down the "required" 20% down payment. If you live in Florida, California, or Nevada, that 20% is probably gone. Your neighbor, who put nothing down, will now end up paying back what you have left on your loan, which is about 80% of the original value, or 100% of the current value. Their repayment amount could possibly be even less than you if their ability to repay is still not sufficient. I hoped you learned your lesson. Next time buy a bigger house. And of course, don't forget to remodel the kitchen and bathroom while you are at it.

Fortunately, the plan is still being discussed, so hopefully some steps will be put in place to reduce moral hazard, such as having rates and payments increase as the borrower becomes better able to make payments, or allowing taxpayers to recover some or all of the lost and forgiven loan principal once prices recover and loan to equity values become more favorable. Otherwise, no matter how good the intentions are, or how necessary the plan is, the unintended consequences of rewarding bad behavior and poor decision making will cause confidence in the banks and the housing market to take much longer to recover.

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This article has 24 comments:

  •  
    Oct 31 12:02 PM
    What a genius, leave it to our government to invent a policy that will:

    1. Instantly make all good loans into bad ones. Why pay your mortgage? Make yourself "unable to pay" and you'll be rescued. I have myriad of ways to do that, including spouses quitting, racking up HELOC so I can't pay.

    2. Instantly encourage/reward people for not working. Working/Earning money makes one ineligible for this bailout, so why work?

    3. Make paying tax a fool's game. I guess our current generation of govt officials haven't seen a tax revolt yet.

    What foolishness.
    Reply | Link to Comment
  •  
    Oct 31 12:05 PM
    Take all homeowners, AGGREGATE. The ones in trouble are a minority.

    And this is already the pain we're feeling, from this non-majority.

    Now do something to encourage the MAJORITY to become "the ones in trouble" to qualify.

    We'll get the mother of all house crashes, engineered by our smart leaders!
    Reply | Link to Comment
  •  
    Oct 31 12:17 PM
    It drives me mad when somebody who clearly hasn't been in the housing market recently or ever begins bloviating about this kind of stuff--very few mortgages today are initiated with a 20% down payment, in fact very few mortgages in the last 20 years have been subject to that requirement. Most mortgages big and small are initiated with 0%, 3%, or 5% down FHA or VA's; 20% down requirements are a thing of the Gerald Ford era. Even today the stringent conditions in a handful of bubble markets like LA is giving people the wrong impression that credit is that tight everywhere else. I can tell you it's not because I took out a 3% FHA in January of this year with no problem in a non-bubble market.

    And while on the surface it may seem that people who were given way too large a loan for their income will be rewarded, they really won't; the prices which they paid for their homes are likely to be so inflated that the market won't rise up to meet them for many years and they'll likely take their loss later. Only people who really stay in the homes for decades are likely to see a profit rather than a loss, not the common scenario any more...
    Reply | Link to Comment
  •  
    Oct 31 12:29 PM
    MalKiel,

    Ever considered that there are people who're making mortgage payments on time, on their homes because they factored on what they can pay monthly, for 30 years?

    What do you call those people if the govt rescues people who didn't do such due dilligence?

    I would call them fools.

    Prepare for a massive default, as nobody wants to be fools. If you *think* home prices are low now, just wait.

    This is ultimately self-defeating and causes more crisis, if you think out the longer term and consequences. If you care about your home values, you actually DON'T want this to pass.
    Reply | Link to Comment
  •  
    Oct 31 01:07 PM
    Best solution is quick, easy foreclosures. If you can't afford the house today you probably still won't be able to afford it ten years from now.

    Nothing or little down == renter.

    Why didn't I buy that $15M Florida ocean front mansion for nothing down? I could have gotten my loan adjusted into something that I can afford!
    Reply | Link to Comment
  •  
    Oct 31 01:52 PM
    Crikey. If you think the people who have good loans will be pissed, what about those fools like me who have ACTUALLY MANAGED TO PAY OFF THE LOAN. There is no way we can default (i.e. cash in) unless we go out an get some sort of flipping zero down balloon payment interest only 2nd house.

    Not only this there is now talk of a credit card bailout. After all that's only another TRILLION or so. Of course there are the idiots like me who pay off the balance every month that are going to get SCREWED on that deal too.
    Reply | Link to Comment
  •  
    Oct 31 01:58 PM
    brick is right. Statistically, there is 1/3 of all homeowners who have altogether paid off their mortgage and have no monthly mortgage to pay.

    These people would need to quickly buy a mcmansion and default.

    I need to quickly deposit those CC cash out checks and declare victim.

    We'll crash so fast if this happens.
    Reply | Link to Comment
  •  
    Oct 31 02:22 PM
    yeah this has to be the worst idea yet. i'm a relatively new homebuyer, i purchased my house in june 2007 at a time that i thought i was buying low but another 10-20% of the value of my house if not more has disappeared since....i'm sick of being penalized for doing the right thing...i get no bailout, i get no stimulus rebate, i get nothing but accelerated depreciating assets....basically they are telling me to not pay my mortgage, forego my credit score and i'll have the same things that i have now for a fraction of the price...
    Reply | Link to Comment
  •  
    Oct 31 04:06 PM
    Well when you loose your job and your home value is -40% more then hope there is some bailout money left for you. Although I doubt it at this rate. There is no more market economist supporters anymore no fiscal conservatives. We will all suffer until someone says "Stop this madness. It will hurt but it's better than 30 years of recession/depression possible hyperinflation, stagflation, and suffering."
    Reply | Link to Comment
  •  
    Nov 01 05:11 AM
    at the beginning of this crisis (pre tarp), my approach was to figure out some way to fund this segment to prevent foreclosures which effect the values of ALL houses - paid off or not.

    now i realize i was dreaming. the backlog is much bigger than the Realtors say because the have artificially suppressed homes offered for sale. there is a glut, and no matter what happens we are screwed. no good money after bad.
    Reply | Link to Comment
  •  
    Nov 01 07:45 AM
    constructe -
    what the hell are you talking about why would "the hand" lose her job?

    Consider this - brick is right. Statistically, there is 1/3 of all homeowners who have altogether paid off their mortgage and have no monthly mortgage to pay.

    These people would need to quickly buy a mcmansion and default.


    your logic doesn't follow why would someone with a paid off house buy a new one? and IF they could afford TWO houses why the hell wouldn't they be able to pay off the second they were able to pay off the first. shouldn't process get easier with time?
    Reply | Link to Comment
  •  
    Nov 01 07:48 AM
    What the hell is with this site in general?

    nah I got work to do. peace out all
    Reply | Link to Comment
  •  
    Nov 01 08:29 AM
    Well some of us never bought a home without at least 20% down and made sure that the montly payments were affordable. (This is my 5th house in 40 years).

    The problem with these inane homeowner bailout ideas is that they keep housing prices inflated above reasonable levels and prevent RESPONSIBLE buys from being able to afford to buy a house. When housing prices come back down in line with family income, then more responsible people will be able to afford houses.

    All this is doing is proping up excessive housing prices and keeping responsible buyers out of the market.
    Reply | Link to Comment
  •  
    Nov 01 08:38 AM
    Housing prices, like water, will find thier own level, Whatever goofy or unfair things the governmnet does, it will only postpone the inevitable..
    Reply | Link to Comment
  •  
    Nov 01 09:29 AM
    While I do agree the "plan needs work" , the plan with a payback of some kinds might make sense. However the whole article misses the point.

    This downturn is NOT about Subprime mortgages and housing, that is the symptom of the disease which has been the decimation of the good paying job market for 10 years.

    I am a CPA in CT . In 2006 the savings rate in our country went negative for the first time since the Great Depression. Inflation had been running way higher than cost of living increases. Decreases in benefits and pensions offered by companies also hurt.

    The average person became unable to pay their bills. Many FIXED mortgages are defaulting and PRIME defaults now outnumber subprime defaults.

    The problem is not the house cost as most borrowers can just call up their lender and get a legit modification right now. ITs the cost of everything else.

    When I moved into my house the cost of a tank of heating oil was 200 bucks, it rose to 1000 bucks and now its about 800. Gas was 1.50 a gallon and rose to 4.5 (now down to about 2.60) . Property taxes were 3000 now 6000. . Food went out of control this year.

    In the 1970s inflation resulted in huge increases in the cost of living adjustments for social security recipients. From 1976-1986 I believe COLA increases were 75% . My father who worked for the Govt at the time had even higher COLAs with his performance based increases.

    So you could be ten years later in an inflationary period and be making 75-90% more to pay your fixed debts.

    This is how we crawled out of the last inflationary period into growth. People had higher incomes to pay mostly fixed debts.

    THis time around due to outsourcing , and limited investment by our country in THIS COUNTRY, people have gone backwards in income and many at best stayed equal or fell behind inflation. Social security only received about 30% over 10 years in increases while their costs soared out of control. At the same time medicare premium increases ate up a chunk of that as well.

    This is the root of the problem. At first people borrowed on credit cards some and paid it off with bonuses and sometimes home equity loans. As things got worse, people got stuck with every larger bills. Millions of high paying jobs have been lost. In 1982 80% of jobs had company or Govt paid for pensions that number is like 18% today. Most had medical ins. Today people are lucky to get it and usually have to pay towards it.

    Unemployment doesnt measure underemployment.

    The bottom line ? Until this country invests in infrastructure, alternative energy, energy development in general, the space program etc etc we are not going to see a recovery.

    The standard of living is evening out across the world due to the greed and concentration of wealth once again the masses cant afford life in the USA. This means prices will adjust dramatically and people will just not spend.

    We have stood by while more debt was added to the federal deficit in 8 years than in the last 200 of our country and while the uber rich got richer without the need to invest in new companies here in the US due to outsourcing.

    We watched our Pet food contain poison, our kids toys contaminated with lead , all because we could get it cheaper from China.

    Well the new news is Amercan workers are going to be as cheap as the new China, welcome to the new America.

    Like I said its not SUBPRIME mortgages , its a symptom of the jobs , opportunity mix here. As always the same Govt that just a year ago told you the "economy was doing well, the jobs market was strong" is telling you its the "sub-prime mortgages"

    The same people that told you we were "running out of oil" and "China was using all our oil" when $147 dollars a barrel oil prices were bankrupting the middle class, and encouraged you to "drill more NOW" while oil now is sitting at $64 bucks a barrel

    The same people that give 25 billion to Citibank on the verge of failure only to allow them to pay 25 billion in bonuses ..

    The Greed, speculation, concentration of wealth , corruption, selling out of the manufacturing base , war , all without an investment in the future of our country's new industries has been and is the problem.

    We have been left with a huge mess, leaded kids toys, poisoned pet food, a bunch of rich people on TV trying to explain why they have hundreds of millions in salary while their companies failed and a very divided public.

    Marty

    clhct1@aol.com (feel free to write)

    Reply | Link to Comment
  •  
    Nov 01 05:30 PM
    What the hell is the matter with you people - The Saviour is coming Nov 4th - He will change all this bull$hit into money and redistribute all the wealth so how can we not be better off ?
    Free at least - thank God almighty - free at last (as long as Ayers doesn't help).
    All you morons who blame the last 8 years on Bush better take a look at who actually runs this gov't and it ain't Bush.
    You think this is bad ???
    Wait for the next 8 (or maybe only 4) years.
    Reply | Link to Comment
  •  
    Nov 01 06:31 PM
    Rather than borderline snobbery, the writer fails to acknowledge the gist of the problem. Quite simply, there can not be a recovery without housing
    reverting back to the mean. Since we are dealing with a new paradigm, it's not particularly miraculous to realize that the time has come when the government will artificially prop up the housing market. Since the government has artificially propped up the banks, the insurance companies (more to come), the Credit Default Swaps,etc etc etc , the homeowner is more than entitled to relief as well..As for the $50 billion the writer cries about, AIG has already gone through $145 billion (more to come)
    See the Big Picture: Whatever it takes, do it !!
    If some bad apples are in the barrel, so be it ! Life "ain't" fair, is it ?
    Bottom Line:: The only way to save the economy is to save the homeowner...I don't have a "fatal flaw" in this theory - It's called
    Reality ....Get with it, open your eyes !.
    We're in a "new reality" ...
    Reply | Link to Comment
  •  
    Nov 01 07:48 PM
    You should have put 20% down or you shouldn't have been allowed to 'buy' the house. 3% down is 33:1 leverage. 33:1 leverage qualifies for nothing. Quit your bitching.
    Reply | Link to Comment
  •  
    Nov 01 07:51 PM
    Let the home prices drop. Houses are places to live, not assets to earn money.
    Reply | Link to Comment
  •  
    Nov 01 10:08 PM
    Let the foreclosures roll. The foreclosed can then go down the street and buy an equivalent house that someone else was foreclosed out of for 50%. Maybe they can just trade houses. He will still be a homeowner in as good a house but with a new smaller mortgage he can afford. If the banks will not give him a new smaller loan on his new house, have Fanny or Freddie do it. That way the idiots who made the old unreasonable loan or the idiots who bought it and ended up with it will be the ones who take the losses. What could be fairer?
    Reply | Link to Comment
  •  
    Nov 02 04:56 PM
    Umm can I just ask, are you people insane?

    While I disagree with the structure of the bail out, most people that are in a mess are not there because they wanted something for nothing.

    From what I can see they are there because they have lost their jobs, now last time I looked most people do not want to loose their jobs. Or they made a bad decision regarding the purchase of a home and the loan they used.

    I deal with people every day looking to get into a home of their own and who want to stop paying rent, usually with the aim of putting in the same hard work that everyone else does to pay off that debt and own the roof over their heads.

    We rarely see anyone that can afford to save 20% on their first home and yet somhow I have a default rate of less than 1% among my clients.

    My points are;
    The amount of deposit saved is irrelevant particularly if they would be paying a similar amount in rent each month as compared to mortgage repayments.

    The reasons for the defaults are varied and most people would not choose to get a bad credit rating in the hopes that the government will bail them out.

    The government is trying to keep everyone's lives from getting worse so instead of endlessly critisizing everything they are trying to do, come up with a better solution if you don't like what is on offer. (Though I do think they should structure things differently with a better end result)

    Stop judging people you don't know just because there is little to no banking regulation in the US and some people made use of that to gain a dream.
    Reply | Link to Comment
  •  
    Nov 02 08:03 PM
    ElisaS

    How little you know of the true nature of the catastrophe.

    The Complexity Of Corruption Is Vast.

    To Assume Benevolence Is Foolish.

    Socialism Sucks !!!
    Reply | Link to Comment
  •  
    Nov 02 11:03 PM
    I was tslking about Waf76 who just bought her house in 2007. Also, even people who put down 20% are getting screwed when housing prices drop over 20% which they are doing in parts of the country. Bailing out banks and the worst offenders helps no one.

    Now unemployment is going up. That will add even more problems. To save the egregious ARM buyers with 1% down is stupid. This type of bailout is like trying to save New Orleans with table spoons and buckets.
    Reply | Link to Comment
  •  
    Nov 15 11:01 PM
    No invest tips or infor here. Thanks Marty for the infastructure and energy plug- you are so right. Why is it the USA spends so much money on nothing.
    Where are the alternate energy bonds, solar bonds, Moon Station Mining Bonds????? If Wall Street had done this type of investments rather than CDO, SWAPS, Derivatives et al we would have a different America TODAY.
    Remember the technology that came from the "real" space program???
    KICK YOUR LOCAL BUM OUT OF CONGRESS and free America from stupidity. OK Long COP, GMO, KO, FLR, Transcanada Pipeline.
    Lets MAKE MONEY. NORTH SLOPE ALASKA IN ON OUR SIDE -LETS DRILL AND PIPE IT THIS WAY.
    DUMP DETROIT;HAVE STEVE JOBS MAKE THE i Car. Free our "tech"
    and free scholarships for "physics majors, engineer majors, mining engineers etc and a free down payment on a bankrupt home.
    DIEGOjames
    Porter Ranch, California
    (Fire II)
    Reply | Link to Comment
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