New at Reason

August 27, 2007

Steve Chapman untangles the political gamesmanship over the mortgage scare.

Comments

Jennifer|8.27.07 @ 7:39AM|#

If people are dumb enough to borrow money they can't afford to pay back, the taxpayers shouldn't have to bail them out. And if mortgage companies are dumb enough to make loans that can't be repaid, they too should have to eat the costs.

That said, I expect to see some bullshit bailout scheme to unfold any day now.

|8.27.07 @ 8:23AM|#

I recently saw a commercial for a company that buys out houses close to foreclosure, and rents them to the people who formerly owned them.

While the people lose their equity, they can get some cash and potentially stay in the house where they're living.

But I'm sure our government has a much better solution...

|8.27.07 @ 8:26AM|#

"While the people lose [some of] their equity, they can get some cash..."

Wouldn't what I added into the brackets be more correct, assuming they got some cash back out of the deal? If they homeowner was upsidedown, I am sure they are still screwed.

|8.27.07 @ 8:43AM|#

"While the people lose [some of] their equity, they can get some cash..."

I'd like to see some numbers on just how much 'equity' these mortgagees actually have.

|8.27.07 @ 8:54AM|#

OMalleySux - Our debate is about semantics. My understanding of how 'equity' is defined, as a non-liquid ownership interest in the house. Once you are not an owner of the house, you have no equity in it, because you traded it for something. I didn't mean for my sentence to read "they lost everything they put into it."

Unfortunately, you're right about the upside down homeowners. My sympathy is somewhat limited, since I see most of these people the same way as I view the people who invested in B2B internet companies in 2001. Or any other investment that didn't pan out.

gaijin - I suspect it depends on the market, and the particular loans they took out. If they put 20% down three years ago, and got a relatively good deal, they could get a lot of that back. If they put 5% down last year, not so much.

|8.27.07 @ 9:03AM|#

Lest we forget, many, many people saw this coming.

|8.27.07 @ 9:07AM|#

Absent consequences, fewer people would repay, and mortgage providers would demand higher rates to lend to the remainder.

Yep, and if there weren't laws against dog-fucking...

Marcvs|8.27.07 @ 9:14AM|#

Yep, and if there weren't laws against dog-fucking...

Paying a mortgage is the same is bestiality? You sir, are an idiot. If there are no consequences to not paying a mortgage, you don't think most people would not pay it?

|8.27.07 @ 9:19AM|#

People with equity to strip aren't the problem. It's the legions of people with no or negative equity that are stuck.

There were a lot of dumb/shady practices that got us into the situation today. Brokers were writing mortgages they had to know could never be paid. Banks were securitizing mortgages they had to know were junk and calling it AAA paper. Now that people are going to lose money on thic charade, the market correction is going to be quite forceful, un unfortunately for some, painful.

The only way the government could make it worse is to offer a bailout...

|8.27.07 @ 9:21AM|#

Boy, is that a misleading tagline. My first thought was "Why the hell would Reason publish an article by Chuck Schumer?" Might as well be a piece by Ted Kennedy.

|8.27.07 @ 9:26AM|#

Marcvs,

Apparently my wit is a bit too subtle for so early in the morning (possibly even ever).

|8.27.07 @ 9:30AM|#

If people are dumb enough to borrow money they can't afford to pay back, the taxpayers shouldn't have to bail them out.

Yeah OK. But it's just as, if not more, irresponsible to bail out the people dumb enough to lend them the money in the first place.

|8.27.07 @ 9:56AM|#

re:Baked Penguin's comments, and the followup from others...There was actually a big article in this Sunday's local paper (Miami Herald) about how, locally, some of these companies which do this sort of thing (buy homes in danger of foreclosure and then rent them to the old owners) are charging hellacious fees in the process.

http://www.miamiherald.com/news/miami_dade/story/215486.html

Not to say such companies are all bad, of course, but people who panic are less inclined to read the bottom line, so this definitely becomes a situation where it's easy to defraud someone.

|8.27.07 @ 10:02AM|#

In the old days, financial institutions that refused to lend to people with low incomes or imperfect credit were accused of victimizing the needy. Today, financial institutions that make many loans to those same people are found guilty of the same crime.

Kind of you to let us know up front that this isn't a serious piece.

Jennifer|8.27.07 @ 10:06AM|#

But it's just as, if not more, irresponsible to bail out the people dumb enough to lend them the money in the first place.

I agree, which is why the rest of my comment said that mortgage companies should eat the costs if they're dumb enough to lend money to those who can't afford to pay it back. I've been reading the Housing Bubble Blog religiously for over a year now, and the majority of people and mortgage companies who find themselves in trouble over this were either stupid, greedy or both.

|8.27.07 @ 10:09AM|#

Generally a good article, but I have to call bullshit on this assertion:

"[L]enders already have good reason to work out bad loans, so they don't get left holding a property that, in today's market, may be worth less than the mortgage."

Big lenders are getting special favors from Washington and, of course, Wall Street got special favors. So, the major players have less incentive to work out bad loans or to avoid them. Sure, they don't wake up every morning and wonder how they can screw the credit markets, but you can't argue that these incentives mean much when the government removes the incentives from the equation.

The article repeats that "incentive" orthodoxy like it actually exists. I don't think borrowers (or anybody) should get bailed out, but if the Gov't has already decided a bail out is necessary, I'd rather see it go to the idiots who borrowed the money than the sophisticated parties that lent it.

|8.27.07 @ 10:11AM|#

Ben P - in the interest of full disclosure, I should point out that recently, my credit, spotless for over ten years, took a real beating. A while ago I had to put some valuable personal property in hock to meet other obligations. To get it back, I had to pay some nasty fees.

Ultimately, it was my responsibility. I have to take the consequences. If my comments made me seem heartless, my heartlessness begins at home.

|8.27.07 @ 10:30AM|#

Kind of you to let us know up front that this isn't a serious piece.

Wow, joe, that's some deep criticism there. Don't strain yourself refuting the article or anything...I wouldn't want you to hurt yourself.

|8.27.07 @ 11:08AM|#

BakedPenguin, I don't disagree. I'm in the reverse situation -- my credit, after a bad business deal left me in hock a decade ago, finally started coming around to something good in the past few years.

We agree, in fact, on the notion that there is a level of responsibility which must be assumed by the debtor.

My point here is simply that it's *very easy* to get swept up in a panic where rational thought is kicked to the curb, at which point it's then held down in the gutter, face-down in the storm-drain water, by people all too willing to make a buck by preying on the panic.

My concern isn't even exorbitant fees, but behavior which dances on the razor's edge of fraud and then occasionally doesn't even bother dancing.

|8.27.07 @ 11:35AM|#

I could live with some regulations about fee disclosure that can be understood by a 5th grader or some such, if that is what comes out of this. Anything else will be more harmful than not.

joe: Schumer is the one electing not to make this a serious issue.

|8.27.07 @ 11:47AM|#

We all have a moral obligation to help those that are suffering, and no one suffers more than the victims of predatory lenders.

highnumber|8.27.07 @ 1:50PM|#

If anyone wants to track the mortgage implosion:

Mortgage Implosion

|8.28.07 @ 1:39AM|#

The Implode a Meter dude bought an overpriced piece of real estate himself ( Casey Serin's site).