Economics

When it Comes to Free & Reduced Mortgages, I Want Everyone to Know That it Took Me Like 5 Years to Pay Off My Goddamned Honeymoon

|

Back before I started working at Reason, when I was in graduate school and broker than Amtrak, my soon-to-be wife (and, alas, now ex) and I splurged for about 10 weeks of pre- and post-wedding travel, here and abroad. We financed the fun via credit cards and it took us, all told, five or more years to pay off the goddamned balance. (And don't even get me started on the cost of our wedding, which we paid for too.) The thought of not paying it off never crossed our minds, even though we literally had no disposable income once the trip ended. We kept switching the balance to new cards that offered free or low-interest transfers and carried the debt until we both started working full-time and threw that particular monkey off our backs.

I mention this because that's how credit is supposed to work: You buy something with somebody else's money and then you pay them back, typically with interest. The risk you take in borrowing helps you to make a wise decision (my elongated honeymoon might not qualify as such but fuck it, you're only young once and only horrifyingly in debt about six or 10 times in your life).

And chew on this: The more you borrow, the harder you work because suddenly you're on the hook for all sorts of shit that needs to be paid for or it will be taken away from you. I call that The Flintstone Model of Capitalism. Contra Max Weber, who thought capitalism was based in protestant thrift and accumulation of savings, Fred works hards because it's the easiest way for him to get a cave jam-packed with modern appliances, a pedal-powered automobile, and slabs of bronto ribs so freaking excessive they flip said car. He's not breaking rocks at the quarry every day for the fun of it. It pays the bills that keeps the lights on. Check it out: As soon as the whistle blows, he slides off the dinosaur's back and hustles home to take the family and friends out to the movies and a meal. I'm betting Fred and Wilma were up to their bearskins in debt and it clarified their priorities just fine. It's not complicated: If you don't pay your bills, the goods stop coming. That's pretty much the basis for vast amounts of economic activity and exchange.

Unless you're talking about the goddamned housing market, where for whatever reason, the government is absolutely convinced that every idiot who bought big just as the market tanked should be bailed out. And that everybody who rents really wants/needs to buy buy buy (it's always a good time to buy a house!). And that the answer to a government-enabled economic crash based on a bubblicious housing market propped up by free and reduced government mortgage subsidies is…more of the same. It's like economic homeopathy and about as effective as inoculating yourself from lead poisoning by…eating lead.

Reuters' James Pethokoukis yesterday reported on the glimmerings of a massive August surprise, in which the Obama administration would simply write off billions of dollars in underwater mortgages. Treasury spokesfolks have said that ain't gonna happen, which is good to hear. But Pethokoukis reports on another possible action: A Morgan Stanley economist has floated before a Senate committee the idea of creating a new "stimulus" by loosening refinance rules for the 37 million government-backed mortgages, which would allow underwater homeowners, unemployed homeowners, and credit-unworthy homeowners to lower their payments, thereby stimulatin' the economy by putting more moolah in the pockets of these dummies rather than the pockets of the banks and GSEs.

The logic is that with the government already on the hook for these loans, there's nothing to lose from dispensing with any creditworthiness criteria for refinancing. The median interest rate on the mortgages concerned is 5.75 percent. These loans, the thinking goes, could be refinanced to around 4.50 percent. The 125 basis-point reduction would leave a borrower with a typical $200,000 mortgage better off to the tune of $2,500 a year. If, as Morgan Stanley guesstimates, half the affected homeowners took advantage of this, they would collectively have an extra $46 billion a year burning a hole in their pockets.

As Pethokoukis notes, this is a foolish idea for at least a few reasons. Such as:

One problem is that the government has already tried to streamline the refinancing process with little success. Another is figuring out who would pay any associated fees. But most importantly, the whole idea seems like a deliberate re-creation of the super-cheap credit and lax lending standards that led to the financial crisis in the first place. That's counter to the White House message that America needs a "new foundation" built on fiscal prudence.

He also cautions that as the Dems' prospects deteriorate even more before the midterms, anything is possible. Or even probable.

And let's face it, Obama was never credible, even when he first took office and started yammering on about how "Tomorrow We Scrimp, But Tonight We Spend Like There's No Tomorrow." Bonus memory from January 2009: The great Wash Post headline, "Stimulus aside, Obama vows future budget restraint."

If only. I like to look toward the future, but one thing that seems to have gone missing from even the recent past (much less prehistoric Bedrock) is the sense that, with apologies to Spider-man, with great debt comes great responsibility to pay it back. Or even any responsibility to pay it back. Jesus H. Christ, the whole point of flop sweat when you sign a housing contract or a car loan or a student loan is that you know you're signing on for a potential world of hurt. The minute you stop thinking about that is the minute you start making really goddamned stupid decisions.

You get one bailout too many—that includes car companies and Wall Street banktards along with home buyers who stretched like Plastic Man to move into that dream house on an ancient Indian burial ground—and suddenly you start feeling really pissed that you have to pay for anything.

Which is no way to restart an economy.

Take it away, Fred:

NEXT: Virginia Continues to Soak Its Alkies, But Maybe Not for Much Longer

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. I’m in the process of buying a boat – can I ask Obama to buy it for me?

    1. Only if you’re either really rich with political connections, or if you’re a deadbeat loser. If you’re a regular Joe with a job and you pay taxes and you do what you’re supposed to do then no you don’t get a boat, you do get the screw though.

  2. First of all , Not EVERYONE that bought HIGH is an IDIOT.

    The real-estate market had been at an ALL-TIME-HIGH since 1992. And, by 2005, it didn’t look like it would stop.

    Many people bought homes in 2004 thru 2006…and they are not ALL IDIOTS who should have known better…or read a crystal ball or something.

    1. They weren’t idiots. They just thought that growth in housing prices that was totally inconsistent with all previous housing market history was a natural event.

    2. they are not ALL IDIOTS who should have known better…or read a crystal ball or something.

      I don’t care whether or not they are rhodes scholars or in possession of said crystal balls, it’s not right that the government wants to take more money from ME to pay for THEIR bad judgements.

      I have spent the last two years watching people take advantage of these massive tax-payer funded tax-credits for buying everything from a car to a house. I don’t blame people for taking advantage of these policies.

      BUT WHY THE FUCK AM I PAYING FOR IT?

      I bought a modest apartment in 1999 and have worked my ass off to pay the mortgage down. Why don’t I get any help? Why should others get more of MY tax dollars to make even MORE bad financial decisions?

      1. And who, pray tell, is the IDIOT.

        And that I would suggest is the whole point. A competitive economy is run by smart people. When stupid people (Wall Street) are running the economy, any wonder it goes to hell?

        Derek

    3. Anybody that paid more than 3x annual income for a house IS an idiot. Sure some of them were able to dump it before the music stopped, but most of them bought even more than they could afford so they got stuck anyway.

      1. Anybody that paid more than 3x annual income for a house IS an idiot.

        Yep, and I cop to that. My wife and I paid juuuust over 3x our income for our house. Then she thought that the whole marriage thing wasn’t really working for her, and she skipped town, and here I sit in my overpriced house, paying that mortage all my byself (as my daughter says).

        You win some, you lose some. This mortage bailout… nay, any mortgage bailout should be fought tooth and nail. I swear to christ I’m gonna get medieval if I end up bailing out one fucking Seattle Yuppie who just had to have the hardwood floors.

    4. Hey, if you bought a house you could afford and intended to live in, then its “value” isn’t really a problem. That’s what we did. I have no idea what my houses’s current market value is, and I don’t really care. My family lives in it, which makes it infinitely valuable to me.
      If you bought a house that you couldn’t possibly afford, then you’re an idiot.
      If you bought a house intending to sell it at a huge profit in a few years, then guess what, you gambled, and one possibility when gambling is you might lose.
      If you can’t afford to lose, don’t gamble.

      1. This.

        If you plan to live there, falling property prices just mean you pay less property tax.

        The big problem with falling house prices is decreased labor mobility — it’s hard for a lot of people to take the loss of equity if they have to move to a new job.

        The big winners of the last few years are renters.

    5. Alice, when you grow up and move out of your parent’s house, I think you’ll probably make a better decision than most of the people who bought at the peak.

    6. You’re right Alice. But the one’s who bought a house that they could not afford and now expect me to bail them out are idiots and fuck them.

    7. All through the boom times, those non-idiots laughed at me for not buying. The non-idiots told me I was stupid for saving up 20% for a down payment. The non-idiots called me silly for thinking that the trend couldn’t continue.

      I now own, thanks to them crashing the prices back down to something affordable.

      1. Affordable housing is a bug, not a feature.

    8. Many people bought homes in 2004 thru 2006…and they are not ALL IDIOTS who should have known better…or read a crystal ball or something.

      What’s your point? Ok, Alice Bowie, illicit love child of David, *poof*, they’re not idiots. Why does their upside down mortgage have to come out of my hide?

      They gambled, they lost. Just like members on this very board did. The difference: you take the hit and come away with your newfound knowledge that the housing market works just like every other market.

    9. Credit bubble. Look it up. Read it. Apply to life decisions.

      Purchasing something for more than it is inherently worth because you think you will be able to sell it for more at a future date, since the price has increased in the past, is idiotic.

      Greed and stupidity are a motherfucker.

  3. “Jesus H. Christ, the whole point of flop sweat when you sign a housing contract or a car loan or a student loan is that you know you’re signing on for a potential world of hurt. The minute you stop thinking about that is the minute you start making really goddamned stupid decisions.”

    I felt the need to repeat that.

    1. It also explains Congressional spending decisions, doesn’t it? No potential repercussions on an individual level, so the stupid runs rampant.

    2. Thank you, AA – that was indeed worth repeating!

    3. Moral Hazard? Whats that?

      1. The Dukes cousins from three counties over.

        1. or Duke’s

          hmm not sure I will have to find the opening scene for the show.

          Just a good ole’ boys…

    4. The minute you stop thinking about that is the minute you start voting Democrat.”

      1. Yup, and little kids in bombed-out foreign villages, their guts hanging out, dying, killed with your tax dollars. The minute you start thinking about that, you stop voting Republican or Democrat.

        1. Hey, my tax dollars are defending those kids. What are you, North Korean?

  4. And, by 2005, it didn’t look like it would stop.

    WTF? Yes, it did.

    I specifically avoid knowing shit, and in 2005 I was telling my suddenly all housey-eyed broke friends not to buy at the end of a bubble.

    Seriously, WTF?

    1. Seriously, WTF?

      I believe WTF’s known as “Barely Suppressed Rage” now…at least on Reason…

    2. I was thinking the same thing about my friends. That and, “you paid what for the what now? Your mortgage is what?”

  5. The interest rate isn’t the problem. Being underwater is the problem.

    It’s no more rational to pay 4.5% interest on a mortgage that’s $100k underwater than it is to pay 5.75%.

    So, people will still walk.

    And those that pay the 4.5% were going to pay the 5.75%, so you’re just giving away money. Money that you’ll need to cover all those empty houses.

    1. If the feds really refi a bunch of losers to 4.5%, I may have engage in violent protest.

    2. That’s bullshit. If you bought your house as a home then it doesn’t matter if ur underwater.
      If you bought as an investment then too fucking bad

  6. They should have bailed out the homeowners instead of banks.

    Homeowners are dragged through a six month process for a Loan Modification with tons of forms. If one field is left blank on any form, the bank throws your application in the garbage and tells you to refile.

    On the other hand, TARP was a 3/4 page contract and BOOM…$Billions of dollars given to banks. Now, these banks didn’t use TARP to bail out the little guy or give loans. These banks were the MARKET MAKERS that brought back the stock market.

    1. Does it ever occur to people like you that NO ONE should have been bailed out?

      1. But … but… WON’T YOU THINK OF THE CHILDREN!!!!!!!!!!!!!!!!!!!! Plus, AMERICANS ARE TOO FAT!!!!!!!!!!!!!!!!!!!!!

        1. hahahahah.. too fat..

      2. No political will for that. Doesn’t exist on the right or left.

      3. …NO ONE should have been bailed out?

        Then NO ONE would be able to skim funds and allocate billions to cronies.

    2. “Homeowners are dragged through a six month process for a Loan Modification with tons of forms. If one field is left blank on any form, the bank throws your application in the garbage and tells you to refile.”

      Is this some sort of spoof or do you really expect anyone here to give a shit? How about you pay what you agreed or walk the fuck away and go back to the apartment you never should have moved out of in the first place.


  7. And, by 2005, it didn’t look like it would stop.

    WTF? Yes, it did.

    I specifically avoid knowing shit, and in 2005 I was telling my suddenly all housey-eyed broke friends not to buy at the end of a bubble.

    Seriously, WTF?

    That’s monday Morning quarterbacking at it’s best.

    1. No, it’s not.

      I moved to Virginia in early 2006. I looked around and said, “Wow, rent prices have stayed flat while prices to buy have zoomed up here. I can get a ton more house for renting, and that’s even ignoring the expenses of maintenance to a house. I’m going to rent until either rents go up or house prices come down.”

      It’s not Monday morning quarterbacking in my case. It is true that people like me were too little of the market. The banks didn’t “take advantage” of buyers; buyers and the banks were thinking exactly the same stupid things.

      And both buyers and banks lost tons of money because of it. I don’t want to bail out ANY of them, even if the government claims that TARP is mostly paid back (unlike the Fannie and Freddie giant money holes.)

      Then again, Alice Bowie is the person who thinks that insurance company profits drive health care costs, even though Medicare and Medicaid have the same issues without profits. It’s clear that your solution to everything is to bail even more people out in order to make it fair.

      1. In the future, people like John who refuse to join in, will be jailed.

      2. Second. I moved to NoVA in 2004 and it quickly became apparent to me that something was FUCKED UP with the housing market here. By 2005 you couldn’t get me to touch a mortgage broker with a ten foot pole.

        Either way, the reality is that you can either afford a mortgage or you can’t. And a lot of people were signing up for contracts they couldn’t possibly meet the terms of long term. Too many idiots thinking they could flip houses for a quick profit indefinitely — someone gets stuck with a hot potato when the buyers dry up – an overvalued house with an unaffordable mortgage payment.

        1. A friend was looking to buy, and the first thing the mortgage broker proposed was for him to sign a document stating his income at double of what he made. Otherwise he couldn’t get the mortgage.

          He walked. At the risk of being repetitive, why should I bail out these fools and thieves.

          Derek

    2. Alice, you must not listen to/read Clark Howard, Ilyce Glink or even Dave Ramsey. All of them warned before the bubble burst that it was coming. Each of these consumer advocate/real estate expert/finance advice guy repeatedly warned their listeners that the housing market was overheated and could not continue as it had done.

      Perhaps many ppl did not hear it, or did not believe it, but the word was out there.

      1. Saw an article, I guess in early 2005, showing different housing markets and how much above the norm they were, based on income and cost of living and some other factors this guy used:

        My city was at 101 in 2004, meaning we were 1% inflated. Most of CA was over 200. It was obvious to me that 2004 was bubbly.

      2. The Economist was warning of a worldwide housing bubble – IN 2005!

        – After repeatedly predicting the rise of such bubble since 2002-3

        Monday Morning was in June of ’05

    3. Jesus Alice, anyone with half a brain saw this coming as far back as 2000. It was in the news for years that prices were skyrocketing insanely.

    4. I don’t know if mentioning the name will get me banned or not, but uhm, over at lewrockwell.com they were warning of a housing bubble way back.

    5. You can’t imagine that anyone could be smarter than you, or actually, umm, read.

      No. Prices were way out of whack. I went through a small town in northern Washingon (I’m in Canada) and everyone, I mean EVERYONE thought that things were going to end very badly. They all said that no one could afford the prices at the wages that were being paid.

      So if you thought otherwise, you were wrong.

      Derek

  8. Nick’s getting pretty salty in this article. That “sucked balls” comment yesterday seems to have just been a warm up.

    1. Jesus H. Christ! You’re right!

  9. Man, I think Nick’s been drinking. That was one surly (and spot on) post!

    1. Those weekend Flintstones marathons always do that to him.

    2. Well, he is a mick…just sayin’…

  10. Bubba you are right.

    We must identify the individuals that are willing to stay in their homes and negotiate with them. The homeowner and the financial industry should share the responsibility…not just the homeowner or the bond holder.

    Right now, homeowners are just walking away from homes that are more than 25% below what they paid for. If this doesn’t stop, it’s gonna b pretty bad around here.

    1. Right now, homeowners are just walking away from homes that are more than 25% below what they paid for.

      Only in the 16 non-recourse states.

    2. The homeowner and the financial industry should share the responsibility.

      FOAD

      HAND

    3. Yes. And a generation of homebuyers will be inoculated from government/realtor/wall street sales jobs.

      Tell me how this would be unhealthy.

      Derek

  11. Each time another bailout story comes out it just reinforces my belief that all this just needs to fail. Let the zombie banks fail, let the boondoggle bankrupt unionized corporations fail, let states and cities deal with their waste without a federal bailout, let people who can’t pay their mortgages lose their homes and (god forbid) move into apartments they can afford. Burn baby burn. Yes it would be more painful in the short term but sometimes it’s better to rip the bandage off quickly and let the wound start to heal. We would emerge as a stronger nation and a MUCH fairer one.

    1. Pablo, to be devil’s advocate, this obviously makes you some sort of racist who would prefer to see children working in salt mines.

      In all seriousness, that’s exactly what should have happened. The world should have taken its medicine. We should have quit that particular drug cold turkey. And it would have sucked. People might very well have ended up on the street in the short term, but tough shit. They fucked up. That’s what life is about. Fucking up. And learning not to fuck up again. My student loans are testament to that. Next go ’round, I’ll just become a goddamn car mechanic or electrician.

      1. Yeah and it scares me to see where the country is going. When people are rewarded for being stupid and/or careless, and punished for being smart and careful, it’s not hard to figure out what will happen.

  12. Bedrock was on the bronze standard. The dollar bought you more back then.

    1. If I were on Facebook, I would “like” this comment.

      1. And if you were on Facestonetablet, you would chisel out a mammoth thumbs-up. But here at H&R, the kids just give a +1.

        1. +1

        2. I want a mammoth thumbs-up.

    2. I thought they used clams.


  13. Each time another bailout story comes out it just reinforces my belief that all this just needs to fail. Let the zombie banks fail, let the boondoggle bankrupt unionized corporations fail, let states and cities deal with their waste without a federal bailout, let people who can’t pay their mortgages lose their homes and (god forbid) move into apartments they can afford. Burn baby burn. Yes it would be more painful in the short term but sometimes it’s better to rip the bandage off quickly and let the wound start to heal. We would emerge as a stronger nation and a MUCH fairer one.

    I would ONLY let the people who bought homes for SPEC/Investments Burn. I would seriously consider bailing out homeowners that want to stay. And, give them incentives for not walking away and destroying the values of every home around them.

    I believe that NOBODY should have been bailed out. But, since we’ve already bailed out the BIG guy, the little guy deserves the same…and that is just my opinion.

    1. I would ONLY let the people who bought homes for SPEC/Investments Burn. I would seriously consider bailing out homeowners that want to stay.

      The problem is, your proposed first group includes many people in your second group. I.e., lots of people bought houses to live in, but also speculating that the value would increase greatly, and that it was therefore a good investment – and driven by that, bought more house than they could really afford. They assumed there was no way they could lose.

      How would you differentiate who gets bailed and who doesn’t? Based on your test, you would have to try to determine their subjective motivation at the time they bought the house.

      1. Not to mention…it’s not your goddamn money.

  14. People who walk away from debts they promised to pay back are scumbags with no honor.

    Usually, the bank will work with a homeowner in trouble, because it is in the bank’s interest to do so.

    But when people just walk away… Off to debtors prison!

    1. I should say this applies only to people who aren’t bankrupt.

    2. Would you include businesses in that category? It is routine for businesses to breach contracts when circumstances change and it becomes cheaper to walk away and pay the damages stipulated in the contract, as opposed to sticking with a bad investment. Why should individuals be viewed differently?

      1. Exactly what damages are these people paying exactly?

        1. Whatever the contract says. If the buyer doesn’t pay the bank gets the house. And in most states can come sue the owner for the loss.

      2. Are you willing to impose the same loan, collateral and creditworthiness conditions on the housing market that exists on the commercial loan market?

        Derek

    3. Pablo, I don’t think I would make any distinctions between individuals and businesses.

      I think walking away from a debt should automatically trigger bankruptcy.

    4. So you don’t think the bank should have to honor its contract?

      The contract says if the borrower doesn’t pay the bank gets the house.

      If the bank doesn’t want the house any more, too fucking bad for the house.

      Here’s what you don’t get: if you give the bank your house, you did pay them back. In non-recourse states, at least.

      1. Too fucking bad for the bank, that is.

        1. I heard you pitch that line once before, and goddamn if it didn’t open my eyes.

          So there you go folks; arguing on the Internet changed someone’s mind. 08/06/2010

      2. The contract says if the borrower doesn’t pay the bank gets the house.

        No, the contract says the bank gets the house – then when sold, either the bank refunds the residual to the borrower or the borrower makes up the difference to the bank.

        Except in the IDIOT 16 states, of course.

        1. No, the contract says the bank gets the house – then when sold, either the bank refunds the residual to the borrower or the borrower makes up the difference to the bank.

          really, why does that not work on any other loan. When I get a car loan, the car is the collateral, one reason I have to put such a high downpayment down and get full coverage insurance. Assuming I have that, if I cannot make a car payment, do I owe them the residual of the car after they repo it?

          1. Yep. And unlike banks, they absolutely will hound you to the end of the earth to collect.

            1. Also, repoed cars dont bring much at auction, so the residual tends to be higher than if you sold the car first.

            2. haha, good to know collateral is just window dressing. I guess the other side to that is the risk of personal bankruptcy, which can wipe out your remaining debt.

              1. Right, the purpose of collateral is to get MOST of the owed money back.

                With a credit card, I can walk away (via bankruptcy) and they get nothing.

                Its the purpose of a secured loan. Secured against bankruptcy.

              2. Also, its why banks will work with you even in recourse states. They know they cant get blood from a turnip, show them you have no assets and they will often do a “deed in leau of foreclosure WITHOUT recourse”. It dings your credit, but not as bad as a foreclosure or bankruptcy. And pre-Bush/Obama policy change, the amount forgiven was taxable income.

                1. Banks are not working with people like they should be.

                  There are perverse incentives about.

      3. Even in the non-recourse states, jingle mail doesn’t really change the fact that you still defaulted on your contact. All the non-recourse law does is limit the bank’s recovery after you default.

        So, yeah, that’s a risk the bank took. But you still breached the contract and broke your word. If you don’t care about people doing what they promise to do, that’s cool.

        I always counsel my clients not to do business with anyone they don’t trust, regardless of whatever contract protections I can get for them. Because contracts will never make doing business with a scumbag as good as doing business with a decent human being.

    5. Fluffy, I guess you are right, walking away is just executing the clause of the contract that says the bank gets the house, so both sides I guess are still upholding the contract.

      But it still seems so scumbaggery to me. Especially if you still have the same income you’ve always had, and have the ability to pay the monthly payment.

      1. Fluffy isnt right*. You owe the full amount of the loan, if the house doesnt cover it, you still owe what’s lieft.

        *X16

        1. so collateral doesn’t really mean much? The bank is just betting on your ability to pay, the house is merely the first hedge?

          1. In days of yore (20% down, somewhat stable housing market) that was enough. If you put down 20%, and knocked off a percent or two before you went into foreclosure, the value would have to fall 22+% to be underwater.

            0% down and 50% fluctuations change things.

            1. Rational behavior for banks would have been to require HIGHER down payments as the bubble expanded, to account for the greater risk. Which would have had the effect of deflating the bubble before it expanded too much.

        2. You’re both wrong, actually. Whether a mortgagee can get a deficiency judgment against a mortgagor depends on the type of foreclosure, which is governed by the terms of the mortgage, which in turn is governed by state property law (significantly, whether the state subscribes to the title theory of mortgages or the lien theory of mortgages). Furthermore, even if a mortgagee gets a deficiency judgment, it may not help him very much if the mortgagor is in bankruptcy or is otherwise judgment-proof.

      2. Easy on the prison thing for civil matters. Not so liberty-minded, that.

        1. Exaggeration, caused by disgust with scumbags.


  15. Then again, Alice Bowie is the person who thinks that insurance company profits drive health care costs, even though Medicare and Medicaid have the same issues without profits. It’s clear that your solution to everything is to bail even more people out in order to make it fair.

    I believe BOTH Private Insurance AND Medicare/Medicaid DRIVE Healthcare Prices up. And, by belief is a libertarian one (although I’m a liberal). I believe that since the patient is NOT paying for care, the DOCTOR charges whatever he/she feels like, AND the INSURANCE company pays it. Too much disconnect between patiend and provider.

    1. Well, not quite. Each insurance company has their own price list. Anything above that, the Doctor eats (according to state law, at least in Va.). Ins companies also have their own rules about what treatments they will pay for.

  16. Amen, Jacket. Yesterday there was a post about the gummit offering loans with 0 down and no PMI, and I felt like such a sucker knowing how much I spend on PMI every year. Now I am recalling how I, too, took about 7 years to dig out of debt. Getting more pissed by the minute.

    1. Nick never revealed if he wore a black leather jacket or a white one for the wedding. What about Misses Jacket?

  17. my soon-to-be wife (and, alas, now ex) and I splurged for about 10 weeks of pre- and post-wedding travel, here and abroad. We financed the fun via credit cards and it took us, all told, five or more years to pay off the goddamned balance. . . . we literally had no disposable income once the trip ended.

    If you had one threesome in the Amsterdam re light district, it was well worth it.

  18. Someday, maybe Fred will win the fight. Then that cat will stay out for the night.

  19. LibertyMark,
    I don’t think you (or any of us, the TAX payers) should pay. I think that the homeowners THAT ARE BANKRUPT and want to stay in their homes should STAY in their Homes. The Government should put a STOP to the foreclosure, and have the INVESTOR (the banks and bond holders) re-negotiate with the Homeowner to atleast get $.75 on the $1.00 as oppose to $.25 (which is what happens when a person strategically defaults and doesn’t pay for two years.)

    1. Alice,

      You don’t realize the disconnect in these two statements?

      1.) I don’t think you (or any of us, the TAX payers) should pay.

      2.)The Government should put a STOP to the foreclosure, and have the INVESTOR (the banks and bond holders) re-negotiate with the Homeowner

      Who do you think ends up paying for the government intervention in to “THE INVESTOR”?

  20. The government wants people who aren’t creditworthy to get cheap loans because, well, the government isn’t creditworthy and wants cheap loans.

  21. Alice,

    Then I think we are in very close agreement. The only thing that separates us, is that you want to use government power to force what you think is the best solution onto society.

    There is already a huge amount of common-law history, as well as specific statutes, on how to deal with bankruptcy. We have everything we need.

    But, I believe many of the scumbags trying to get out of their loans are not bankrupt, and just want to be relieved of their responsibility.

    BTW, you are correct that the problem in health care is third-party payer. But I suspect that you want to empower government to “fix” the problem and it will make it only worse.

    1. I think that the ONLY thing I want to the government to do at this point is to OUTLAW third party payments in health insurance matters. That includes (private and public health insurance plans).

      Everyone has to pay their doctor/hospital out of their own pocket.

      1. You and Abdul are big on the threesomes. A big tent it is.

  22. The government wants people who aren’t creditworthy to get cheap loans because, well, the government isn’t creditworthy and wants cheap loans. Been that way since 1999.

  23. OK, so how does my comment which has no links and no mention of any commercial product get marked as spam while the same spambot can post the same goddamned link every day.

    1. The spambot used you as a human shield.

    2. Would some CHEAP VIAGRA make you feel better ?

  24. The government wants people who aren’t credit-worthy to get cheap loans because the government isn’t credit-worthy and wants cheap loans.

  25. The government wants people who aren’t credit-worthy to get free money because the government isn’t credit-worthy and wants free money.

  26. Tman,

    I’m saying that the we (the government and it’s taxpayers) should be paying NOTHING. And, just for the crappy loans created by the industry. The government can intervene with policy and laws without using TAX PAYER FUNDING.

    Right now, the plan is to keep the homeowner in the house and PAY the investor what the homeowner can’t pay. I THINK THIS IS WRONG !!!!!!!

    We should NOT PAY for ANYONE. There’s a deal between the two parties. The BANKS/INVESTORS can care less of the lives of the homeowner and will through them to the street and recover almost nothing when they (the homeowner) leaves.

    Many municipalities have done this. That is, put a moritorum on foreclosures and MAKE the BANKS/INVESTERS re-negotiate the PAYMENTS.

    And, I think that this should only be done to primary residents where the homeowner HAS to walk away.

    1. There’s a deal between the two parties.

      Yes, there is. In the case of a mortgage, there is a contract that says “I promise to pay the bank X. If I do not, I am out on the street and the bank gets the house.”

      The BANKS/INVESTORS can care less of the lives of the homeowner and will through them to the street and recover almost nothing when they (the homeowner) leaves.

      Why should the bank “care”? It’s a contract. You didn’t keep your end of the bargain. Life isn’t fair. Tough cookies. The bank doesn’t invest in “feelings”, it invests in emotionless properties that either increase the shareholders values or do not.

      That is, put a moritorum on foreclosures and MAKE the BANKS/INVESTERS re-negotiate the PAYMENTS.

      So you want to force the banks to pay for the homeowners bad decisions? Banks will renegotiate if they think this will lower their overall loss, but they aren’t obligated to do so. You are arguing for the government to redistribute the banks wealth so that stupid homeowners don’t have to deal with the consequences of their bad decisions.

      And the bottom line is that if the government forces the banks to do this, then the bank will end up charging more money to its customers WHO DO pay for their loans to make up for the loss.

      AGAIN, WHY THE FUCK AM I PAYING FOR IT?

      1. Unfortunately, with today’s solution, you are paying.

        I’m saying that we should NOT be paying.

      2. Unfortunately, many Banks have also gambled with the market, dragging their feet and ignoring alternate options with many home owners in trouble on their mortgages, only to cry foul when the properties drop even further in value and foreclosures increase.

        That’s their choice, but there’s something wrong with the banking market when foreclosures don’t hurt the banks as well, as evidenced by this behavior.

        I blame the bailouts for much of this behavior.

    2. That is, put a moritorum on foreclosures and MAKE the BANKS/INVESTERS re-negotiate the PAYMENTS.

      If I’m the guy living in the house, where’s my motivation to negotiate at all, let alone in good faith, if I can’t be foreclosed upon?

  27. Apparently “cheap loans” sets off the spam filter.

  28. Amen, Nick.

    thereby stimulatin’ the economy by putting more moolah in the pockets of these dummies rather than the pockets of the banks and GSEs.

    At least you know they’ll spend it 🙂

    Also, I have trouble taking anyone seriously who uses the word ‘guesstimate’.

  29. Drax the Destroyer,

    It’s easy to say ‘Tough-Shit’ to people and families on the street until they try to come and kill u.

    1. So you’re saying we need to give them our money or they’ll kill us? Should we feel sorrier for these people than for any other mugger?

      1. The central fallacy is that the people too lazy to make enough of themselves to stay out of bankruptcy have the wherewithal and drive to participate in an armed uprising.

        In an all-out war, the parasites lose in every reasonable scenario.

        1. Yes, but if they threaten enough, I’ll finally be able to convince myself to waste money on another AR-15. I think this one needs to be 6.8mm.

        2. The even bigger central fallacy is that everyone would be out on the street.

          In a total liquidation, values would fall so far that the price of housing overall, including rental housing, would crater.

          All these people would be living somewhere.

          I am starting to wonder if maybe deflation isn’t the misunderstood genius adolescent of the economics world. We spend a huge amount of our time trying to avoid it. But the 19th century had several deflations, and living standards skyrocketed. It’s entirely possible, I think, that economists are overlooking the long-term benefit to persons with average incomes of periodic resets down in the prices of major assets.

          1. I Don’t know how old u r Fluffy, but in Dallas in the early 80’s, people in Condo Unit 4A were defaulting and moving into Condo Unit 4B and vise-versa.

          2. I am starting to wonder if maybe deflation isn’t the misunderstood genius adolescent of the economics world. We spend a huge amount of our time trying to avoid it. But the 19th century had several deflations, and living standards skyrocketed. It’s entirely possible, I think, that economists are overlooking the long-term benefit to persons with average incomes of periodic resets down in the prices of major assets.

            Im claiming a fucking nobel prize in economics if this turns out to be true. Because thats what Ive been claiming for years.

            they’d chosen always the clear, safe course that leads ever downward to stagnation.

            1. Isn’t it just pretty straight forward common fucking sense? (not swearing at you personally robc, just in rant mode)

              If productivity is increasing, prices should be going fucking down, not up. All the rest of the stuff about optimal quantity of money and “good inflation” is just a giant fucking sack of horseshit, designed to confuse and mystify. And it’s been working for quite a while.

              1. Price is set by demand, not production cost.

                So if demand rises faster than production can keep up with, the price will rise even as production cost decreases.

                And that’s how we make the big bucks 😉

          3. I think the “greater standard of living” phenomenon may result not from the revaluation of assets, etc., but from the fact that the consequences of market forces to improve that standard are finally seen without smokescreen. Under inflation, the market works hard to push quality up and price down, but the monetary unit becomes worth less and less, so prices seem stable or, in the worst cases, may even rise over time. Under deflation (or even true monetary unit stability), the effect of the market is no longer defeated or hidden. We see prices going down FASTER than wages can go down. You can see this effect clearly if you normalize prices and wages to “constant dollars” (or, as the Dallas Fed once did, to man-hours of time).

            When most people think of a “stable dollar,” they think of a dollar that continues to buy what it always did. But the normal course of free-enterprise is to drive costs and prices down, so that the dollar is worth more, at least in whichever segments of the economy where those forces act most vigorously. In order for prices to remain stable “naturally,” the costs of production and distribution must remain stable — as we would expect in a mature industry, in the presence of precisely adequate resources (which also have stable prices). Sometimes, prices rise because of shortages of one resource or another — perhaps caused by competition from another sector. But usually, prices go down, because the accumulation of knowledge allows industry to produce more with less. A carefully regulated inflation, however, can make prices seem “stable.” People keep paying what they’re used to for goods and services — making them feel “secure” — while the additional value created by increasing information & efficiency gets siphoned into the pockets of those who get the new money or charge interest on it. Pretty good scam, ‘eh?

    2. No. It’s easy to steal other peoples money and call it charity. It’s hard to watch real people live with the consquences of their decisions, and use the thinking part of you brain instead of the emotional part.

      1. I don’t think it’s hard at all. I have to live with the consequences of my decisions. Why should it be difficult to watch other people do the same?

    3. Two Points in response to your comment Alice:

      1-I didn’t say I was magically exempt from any of this. I’m a pretty incompetant waste of life on most days. I will probably end up on the street due to this incompetance/laziness/etc. I don’t think anybody should have to protect me from the consequences of my decisions.

      2-If the people on the streets actually come and kill me I will be dead and I won’t be able to pay taxes anymore. Sounds like a win-win to me.

  30. I closed on my house in ’05. I had bankers coming out of the woodwork to offer me ARMs for twice as much money as I borrowed on a fixed rate to build the house.

    My neighboor down the street was real player in the game. He built a house with his father-in-law’s help (they did most of the construction and finishing themselves). Then the in-laws moved into his basement. Then they started building the in-law’s house three doors down. When that was done, my neighbor bought another lot somewhere else and started building a bigger house. He put his current house on the market just as it tanked. He lost the half-built house and his current house.

    He now lives in the in-law’s basement. I smile everytime I think about it.

  31. All of this refinancing is really a way for the government (Fannie and Freddie) to MAKE money in the long run. Let me explain. We have a $200,000+ mortgage that we are paying on at 5.5%. We are almost 10 years into it. I had a mortgage broker solicit a quick refi because Fannie/Freddie held the note. He offered 4.75% over 30 years. Sure it lowered the payment $200 per month. But when we calculated out the total interest, they ADDED $20,000 in total interest because of the longer term. We didn’t do it because our existing loan is 2/3 complete. All these refi’s are a way for the government to raise revenue in the long run. Who’d a thunk!

    1. You would save a ton of money by paying an extra $100/mo and refi at 4% for 15 years.

    2. You could take the loan and then just keep paying the additional $200 a month. You’ll pay off faster and spend less in interest.

      1. Bob, listen to kinnath. Then kindly pay him a nominal sum for his financial advice.

  32. That was a pretty good rant, Nick.

  33. Look TMAN,

    The bank ALREADY made it’s money in the securitization process. And, if the bank is the originator, it made it’s money on the origination process.

    Today, the bank only acts as an agent for the investor and a servicier to the load holder. THE BANK HAS NO MONEY TO GIVE OUT !!!

    I’m not saying MAKE the BANK pay for the IDIOTS (as you call them).

    I’m saying have the government mandate that for homeowners THAT WANT TO STAY in their HOMES but STAYING MAKES NO SENSE, FORCE the INVESTOR (the bond holder…NOT THE BANK) to re-negotiate with NO TAXPAYER money in play.

    As far as promising to pay and NOT paying, that is what Bankruptcy is. GM was allowed to default on it’s pension plans (which they promised) to pay, didn’t they?

    I think Donald Trump is on his 4th Bankurptcy.

    1. Alice, your infatuation with ALL CAPS marks you as a complete loser, that and the inability to convey a coherent message in written English.

      1. Why thank you

    2. Alice,

      The bank ALREADY made it’s money in the securitization process. And, if the bank is the originator, it made it’s money on the origination process.

      Not if the value they priced the house at during closing drops as considerably as it has. This of course, is exactly why the housing market did so much damage during the recession. Banks lost billions of value because they, along with the homeowner, bet that their investment would bring a positive return over time. When the market value of these houses collapsed, all of the money the banks “made” in the original purchase was gone.

      have the government mandate that for homeowners THAT WANT TO STAY in their HOMES but STAYING MAKES NO SENSE, FORCE the INVESTOR (the bond holder…NOT THE BANK) to re-negotiate with NO TAXPAYER money in play.

      This makes even less sense. You are now saying that the bank AND the homeowner should be held free of consequences for their bad decision, and instead the investor should pay for it?

      The bottom line here is that until the homeowners and the banks are held responsible for their bad decisions during the housing bubble, we will never finally reach a floor where the housing market can start to become stable again. Bailing everyone out except the investor will not give us a stable housing market.

      And you are clinically insane if you think that by penalizing the investor somehow this won’t have any adverse financial consequences for the taxpayer.

      1. I’m sorry Tman,

        You don’t understand that the BANK is nothing more than a middle man. The BOND HOLDER (the investors) are the ones that loose. I know it looks like the bank looses because they service the entire thing (including the foreclosure on behalf of the investor). The bank has NOTHING to loose. they made their money.

        I’m saying that the deal should be struck between homeowners (who in good-faith want to stay in property) and the investor. Leave the TAX payer out of it.

        1. Alice,

          You don’t understand that the BANK is nothing more than a middle man.

          If this is true, then how come so many of these banks have failed during the recession?

          FDIC: Failed Bank List:2000-2010

          You act as if the bank made it’s money and has nothing to lose. This is completely wrong.

          The bank has NOTHING to loose. they made their money.

          Again, wrong, wrong, wrong, wrong. I have a sad sinking feeling that you have picked up this view from reading too much Krugman, so I can give you a pass, but the idea that the bank has nothing to lose is insanely inaccurate.

          I’m saying that the deal should be struck between homeowners (who in good-faith want to stay in property) and the investor. Leave the TAX payer out of it.

          You continue to believe in some fairy tale world where the government can force investors to lose a huge chunk of their investments by allowing people who can’t afford the payments on a mortgage to stay in the home.

          It would be less depressing if it wasn’t for the fact that the current presidential administration lives in the same fairy tale world. And here’s the kicker- the efforts to reduce principle and mortgage payments through tax-payer backed reduced mortgages has done nothing-zero-zilch-nada to slow the foreclosure rate.

          Turns out that most of the people who couldn’t afford the mortgage can’t afford the lower priced mortgage either, and instead we have a nice fat bill for the taxpayers to eat in the form of Fannie and Freddie.

  34. Look, everyone here knows I favor total liquidation even if that brings about lots of economic pain. Even if I get caught up in it, too.

    But of the various cockamamie plans put forth by the government so far, this one is the least cockamamie.

    The agencies are already on the hook for these loans. The federal government has already put itself out there as the guarantor of the agencies’ obligations. Hell, the Fed OWNS a huge portion of the outstanding agency debt now, anyway. So there’s really no way to increase the government’s exposure to the costs of these loans defaulting.

    That being the case, churning a bunch of that debt over again doesn’t increase the government’s ultimate exposure here and would, in fact, reduce the monthly obligations of borrowers and lead to at least some of them not defaulting.

    The government is already on the hook for your neighbor’s 400 grand loan. It doesn’t really make any difference to your exposure as a taxpayer if that 400 grand is in a 6% note or a 4% note.

    1. Moral hazard. It reduces the intensity of the learn experience that the owner of the 400 grand loan needs to experience.

      1. We already lost our chance to avoid introducing lots of moral hazard this time around. We lost it in 2008, thanks to W and McCain and Obama and our establishmentarian Congress.

  35. And actually, this is also a dodge to bail out the banks again.

    The banks would be delighted if all the mortgages they hold suddenly prepaid.

    Prepayment losses are already baked into their accounting. These loans are 4 and 5 years old now, having them prepay 12 months before the late bubble models had them prepaying anyway won’t really hurt the banks very much.

    But all those potential defaults move off their books if the loans prepay.

    If you own a 400k note in California or Nevada right now, you’re sweating even if your borrower is currently paying on time. It would make you happy as a clam if that borrower refied, because you would get paid the entire current payoff balance. You wouldn’t have to mod him, you wouldn’t have to renegotiate with him, you wouldn’t have to pay a penalty to whoever you securitized the loan with, etc. etc. etc. Him paying off is essentially your dream scenario because it puts that loan firmly in the Win column.

    So yeah, this is pretty much Round 2 of “Let’s All Blow the Big Banks”.

    1. Yea, In California, you can have $10mm in the bank and STILL walk away from a $400k mortgage with NO recourse.

      1. Not entirely true. CA is technically one of the 34 recourse states, is just damn hard to get the courts to agree to the recourse.

    2. If it was like that in New York State, I’d be able to walk away from my $400k mortgage. However, I’m sticking around since my monthly payment is as much as the rent around here.

      1. That may not be coincidental.

  36. Gee Fluffy, you really understand this stuff. I sincerely agree with you.

    I don’t agree that we should let the homeowners that want to stay (and have no where to go but the inlaws house) should stay in their homes.

  37. The logic is that with the government already on the hook for these loans, there’s nothing to lose from dispensing with any creditworthiness criteria for refinancing.

    So, I suppose we’ll be selling treasury bonds to Zimbabwe next.

  38. TANSTAAFL

    1. TANSTAAFH

  39. The banks would be delighted if all the mortgages they hold suddenly prepaid.

    This assumes the homeowner will get a refi for the face value of the loan, and not the current market value of the house. Somebody, somewhere, is still going to have to take a loss.

    Right?

    1. I say, have that LOSS shared between the TWO PARTIES involved (the homeowner and the INVESTOR) and NOT the TAX PAYER.

    2. As I understand it, the plan would be to refi everyone’s existing balance, without reference to the LTV.

      In other words, if you owe 400k they’ll refi it for you, and not do an appraisal or quibble about your property value.

      Basically, the loss is already taken. The feds now own Fannie and Freddie. They will eat the loss if Fannie and Freddie’s portfolio defaults. You’re right that somebody has to take the loss – and that somebody is already us and it’s too late to do anything about it.

  40. Of course Fred and Wilma were in debt – that’s the first time I ever heard the phrase “Charge it” — when Wilma and Betty went shopping!

  41. I’m betting Fred and Wilma were up to their bearskins in debt…

    Chaaaarge it!

  42. “A Morgan Stanley economist has floated before a Senate committee the idea of creating a new “stimulus” by loosening refinance rules for the 37 million government-backed mortgages, which would allow underwater homeowners, unemployed homeowners, and credit-unworthy homeowners to lower their payments, thereby stimulatin’ the economy by putting more moolah in the pockets of these dummies rather than the pockets of the banks and GSEs.”

    The fact is that those mortgages need to be repriced, and if you decided not to let the market and the courts handle that, which is why the government took on those mortgages in the first place, then any attempt to reprice them may be a good thing–comparatively speaking…

    If the alternative is continued levitation of home prices. Remember, prices are always set on the margin, the homes that don’t change hands are priced by the homes that do, and the markets have been waiting for the other shoe to drop really since July of ’07 now. As wrong and unfair as as any non-market solution always is, I’m not sure that the effects of using the banks and the Fed to make home prices levitate until home prices rise back to 2005-2006 levels isn’t worse.

    That could take 20 years or more! Things won’t get better until all those mortgages are back in the wild where they belong. Japan stagnated for 20 years because they couldn’t find a way that a) wasn’t a market solution and b) was fair to people who didn’t make any mistakes and so shouldn’t be required to pay the bill.

    People use their homes to finance their businesses all the time–as their most important asset, for most of them, that makes a ton of sense. We need that economic growth right now, and so any way we can get those mortgages back on the market so that sword is no longer hanging over the heads of all those home prices should be considered.

    There’s no way the Obama Administration is about to sell all those mortgages off to the highest bidder–at least not until after he’s reelected and then he’ll be worried about his legacy. He’s responsible for all those losses anyway, but voters still don’t realize that they’ve already lost all that money.* The sale would make dodging that responsibility impossible–as long as they’re on the books, he can price them for what he paid for them…

    So any way we can get those mortgages back into the market is probably a good thing–and it’s anger inducing to see how unfair it is, but that’s the price you pay for misusing democracy…for using it where you should have used the market instead.

    *I wish more people knew about this. That’s probably the one thing most people don’t know about this that they should know–there’s no such thing as a paper loss! You don’t get to dodge a margin call ’cause it’s only a paper loss.

    The American taxpayers have already lost all that money they overpaid for those mortgages. Actually, selling those mortgages off would only quantify what has already happened–we’ve already lost the money. It’s already been squandered. If more people understood that, maybe our leaders wouldn’t keep running things under the delusion that all that money hasn’t been lost.

    1. That was very very well put.

      You sound like a person that believes in Free Markets and understands that there are ‘Corner-Cases’ where it won’t work.

      1. I’d use rational economic though to my advantage even if I lived in the stupidest command economy imaginable…

        It’s actually a pet peeve of mine when I hear people talk about economics as if it were the best way to micromanage an economy. That’s not the point I’m trying to make, but we should be aware that there are consequences to not doing the inevitable as well.

        I’m in commercial real estate development, and sometimes we have to do some stupid things because of politics. Sometimes doing something stupid is the smart thing to do because the smartest thing to do just isn’t politically possible.

        And if it isn’t politically possible? My investors aren’t about to lose any money because I was so absorbed in the way things should be. There money doesn’t exist a world where things are as they should be; their money exists in the real world, and I gotta do what’s best for them, even if that means conforming to the stupidity of certain political realities.

        I think it’s important for people to know that they’ve already lost all that money though. That we won’t lose money by selling mortgages we overpaid for–we lost the money when we bought overpriced mortgages! Wal*Mart doesn’t make money by selling stuff above market prices–it makes money by buying stuff at below market prices… You get the picture.

        The money is already gone.

        Gillespie and Co. could do the American people a big favor by proclaiming that fact from their soapboxes–paper losses are like Santa Claus and the Easter Bunny, they just don’t exist.

        People would be harder to fool if they understood that holding these overpriced securities is the problem–and selling them is the solution. The staff at Reason do a great job at getting the word out, but I wished they hammered on that one point more. In the meantime, anything that isn’t an all out sale but reprices those mortgages and gets them back out into the wild? Will necessarily always be fundamentally unfair to the taxpayer, but is probably a step in the right direction.

        1. When you say people you seem to omit those that lend. People may be able to realize a loss by selling, but that loss is still owed. So until the banks realize the loss you create the situation where people now have nothing but a debt with nothing to show for it. While agree the money is gone it seems that addressing the end of the problem, the people, is moot if you don’t address the entire chain of problems. Unfortunately that chain is leveraged at every step and the losses increase. So Bob owes on a house he doesn’t have, the bank losses whatever it doesn’t negotiate on the resale, the derivatives become even more worthless which drives institutional investors away…

          It seems a lot more complex than Bob just realizing a paper loss is an actual loss.

          If I’m reading your argument right, which knowing me could be the problem.

          1. What I’m trying to say is that the political problem is that the the US government is holding a bunch of mortgages–about half of which was bought at the insistence of the current president.

            He way overpaid for those mortgages. He bought them at above market rates specifically because they were of so little value.

            He doesn’t want to solve the problem by doing the one thing that would solve most of the problem–auction them off. …because that would make the average taxpayer/voter realize that the president made a huge mistake–and they’re gonna have to eat those losses. So, he holds onto them. …because so long as he doesn’t sell them, he can continue to claim for political purposes that they’re worth what he paid for them.

            If more people understood that you lose your money the day you overpay–not the day you sell–then they wouldn’t be so hard on the president for selling all those mortgages…

            It’s a really basic concept–but very few people seem to understand it…

            In all businesses and investments, you make your money on the way in–not the way out. You don’t make money by paying the market rate and then selling higher. …you make your money by paying less than market and then selling at market prices.

            That’s the way you lose money too. You pay more than what it’s worth and then you sell at market–that’s most bad investments in a nutshell. …but you have to understand that you lost that money the day you overpaid–not the day you sold.

            When I build an industrial building in a submarket, I account for every single vacant and occupied building in the submarket. I know what they’re paying in rent, and I know what every single building sold for. I know every single vacant building and how long it’s been vacant. I know how long it takes to re-rent or sell…

            Banks do that too. If most small business owners use the equity in their homes for business loans (and why wouldn’t they?) and they can’t properly value your home because there are another 30 in your neighborhood that the government’s holding that will come on the market someday at a much lower price than they sold for, then how much equity are they willing to give you for your home?

            Until the government stops the levitation act, how can the local banks that are lending account for the laws of physics, so to speak, when they’re underwriting business loans?

            It isn’t just affecting the homes that the government is holding as mortgages either–prices are set on the margin, and uncertainty will continue to reign as long as the government continues to hold all that paper.

            They must get rid of that paper. But they won’t so long as the president has to take the blame for the losses when they’re repriced. There’s no way the president would do that to himself…

            So, we can stagnate like Japan did for twenty years. …or we can look at creative solutions like the one under consideration here–that aren’t fair, but once the government bought those mortgages, there was no way it ever could be fair.

            The opportunity for fairness disappeared the moment Bush and Obama took on all that paper. That’s when we lost the money–and the more the average voter/taxpayer understands that, the sooner we won’t be encumbered by stupid political considerations going forward.

            Obama will not destroy himself politically to do the right thing–sell the mortgages off at huge losses. So we can hold our breath til our faces turn blue and talk about the way things should be, or we can take political realities into consideration and do the smartest things possible.

            In the meantime, we need people like Gillespie and Cavanaugh to preach the gospel–the losses on this mortgage buying debacle have already been realized by the taxpayers–they just haven’t been quantified. That’s ancient history now–selling them is just recognizing reality, there wouldn’t be anything new to blame Obama for–taking those losses is something he did in the past, not something he’d do if he sold them now.

          2. That’s why Rick Santelli got so upset on the floor in Chicago that day…

            That was the day you were supposed to be angry. Those were the days when you were getting screwed.

            …everything after that has just been figure out what to do after we got screwed–by December of 2008, all of the getting raped was more or less done on this. It just takes a lot of people a long time to realize they got screwed.

            1. Ahh. I understand and agree with notion of making money on the way into investments. It just seemed like you were arguing that since the loss has occurred that the end user/individual (for lack of a better term) should just take the lumps and move on. Which seemed short sighted considering the amount of leverage tied to the mortgages through derivatives.

              I see what you are saying now. Like I noted before, odds are my inability to read was the issue.

  43. The banks are having a field day marketing “Obama refinancing” deals that are misleading at best. One of my clients kept asking me about this great Obama plan that would allow him to refinance without paying PMI, even tho he didn’t have 20% equity. When the disclosure papers finally arrived, the bank had rolled PMI costs into the interest rate. So there was PMI, but the customer didn’t have to pay it (right!) Right up there with the Obama Debt Settlement plans stating that the big O gave all this money to the credit card companies so that debtors could settle for as little as 60% of the amount owed.
    Clever marketing, eh? Doing what could always be done (although settlements have been, can be and are done for less than 60% every day) and giving Obama all the credit. The debt settlement companies don’t make me angry, what gets me is saying it’s Obama’s money that he’s given to the credit card companies to help people, so it’s OK not to pay your debts. Bad on so many levels. Arggghhh!!!

  44. I’ve always found the Jetsons to provide the more appropriate metaphor for the economy and its rat-race: In the end titles, George ends up outside the family’s home in the sky, running on a treadmill that seems to keep gaining on him, as he shouts those immortal words: “Jane! Stop this crazy thing! Jane! Jane!”

  45. Barney and Fred = schlubs

    Wilma and Betty = hotties

    I never quite figured out the math on that one. It must have all been credit-based.

    1. Womens rights were, at that time, a tad bit underdeveloped. They had to take what they could get…

      1. Men are functional, Women are decorative.

  46. So if I understand correctly:

    1. Dude owes $250K to Chase at 5.5%, with the government agreeing to pay if he defaults.

    2. Citi would loan the $250K at 4.5%, so long as the government agrees to continue to cover the default risk.

    I hate to say it, but if that’s really all there is to it, then once you have #1, #2 seems kind of logical. If Dude hasn’t already defaulted, then the refi lowers his payments and presumably encourages him to keep paying.

    1. If Dude hasn’t already defaulted, then the refi lowers his payments and presumably encourages him to keep paying.

      And that’s exactly why modifications have worked so well to keep people from defaulting.

      *cue tumbleweeds, birds chirping, someone in the audience coughing, etc.*

    2. It’s both.

      I think that the attempt to ease housing and the economy down has lengthened the trauma.

      Between the Great Depression, Japan’s experience and now our experience since 2006, it’s becoming clear that downturns with lots of government intervention last much longer than downturns that are allowed to crash to liquidation.

      And long-term, as you note, there are moral hazard issues.

      Ideologically, I am very concerned about the prospects for social amity in our society if the government continues to openly select winners and losers in the way it has for the last 36 months.

      Granted, it has always done that to a great extent – but this time the gloves came off and things were done openly that had never been done before. The shareholders of one insolvent bank had their bank saved, while the shareholders of a different insolvent bank got zeroed out. The bondholders of the auto companies got shafted for the unions. Some classes of debtor got helped while others did not. Etc.

      We have never had class warfare in this country because enough of the population, even when they hated the rich, had a grudging recognition that at least some of the upper class had earned their wealth. As more and more open interventions and blatant favoritism occurs, I think we could see that start to erode.

      When even I am starting to feel some class animus based on the way the state has forcibly prevented the leveraged assets of the wealthy from declining in value, there’s a problem.

      A day may come when the average person looks at their wealthier neighbor and can see all the ways in which the state has intervened to elevate that person and keep him in his position. That will not be a good day for our system of governance.

      1. Damn threaded comments. This is an answer to MNG below.

      2. Threaded or not, I agree with you.

      3. A day may come when the average person looks at their wealthier neighbor and can see all the ways in which the state has intervened to elevate that person and keep him in his position.

        I agree with most of this post in principle, but you’re talking about public companies, in which the investors (i.e. “the wealthy”) generally lost everything even in bailout. GM wasn’t saved for the creditors or stockholders, it was handed to the UAW. AIG wasn’t saved for the stockholders (who lost eveything), it was saved for the policyholders. The financial companies were saved only to prevent a cascade effect.

        I’m not sure any of the bailouts made sense, but the notion they were targeted at helping “the wealthy” is generally untrue.

    3. Dude borrowed $250K on a 3 year ARM with essentially zero interest. Dude expected to refi before 3 years was up and cash out the massive increase in the value of the house.

      The problem is the Dude should never have qualified for more than a $150k loan. And now that the market has tanked, he can’t sell the house or make the payments at any interest rate.

      The administration is just looking for a way to kick the can further down the street while hoping for a market recovery to somehow solve the problem that the Dude just cannot afford the house he is living in.

      1. I agree, and I don’t think that the US govt should be guaranteeing Dude’s loan, but once we do that, guaranteeing the refi loan seems like a no-brainer.

        (Assuming no cash out and some other safety details).

        1. The problem is that there is some responsible person out there that could and would buy this house at its true market value.

          Dude is now is a long-term situation in which he cannot win. He may not understand it, but his mental health is going to suffer far more by dragging this out rather than getting out now.

          So the current policy of the administration denies worthy people the opportunity to buy affordable housing while dragging out the suffering of those that chose unwisely in the past.

          1. Exactly.

            Repeat after me: Markets musthave winners and losers. Otherwise, they have no purpose.

  47. “Look, everyone here knows I favor total liquidation even if that brings about lots of economic pain.”

    Fluffy
    Why do you say this? Is it some deontological stance or do you think the economic pain is necessary to maximize well being in the future (i.e., lessen ‘moral hazards’).

  48. I’m impressed that you paid off your honeymoon in only 5 years. I was still paying for my honeymoon through six years of marriage, and then for another five years after the divorce.

    1. I saved up my money to buy a plain white-gold band and then took a Friday off to get married by a JP.

      After ten years, she finally got a diamond.

      After twenty years, we went to Europe for a 3-week “honeymoon”.

      At twenty-five years, we put down a deposit on the lot we finally built our dream house on.

      She’ll get the key to the wine cellar in another 15 or so.

      1. Where did you find one who wasn’t evil?

  49. Back before I started working at Reason, when I was in graduate school and broker than Amtrak, my soon-to-be wife (and, alas, now ex) and I splurged for about 10 weeks of pre- and post-wedding travel, here and abroad.

    Holy shit, Gillespie, of course it took you five years to pay off your honeymoon. And I hope to God you weren’t still paying it off after the divorce. I mean, that shit’s gotta sting. These young kids I know these days spending $50,000 on a wedding, and they’re still paying it off years after the divorce…

    Anyhoo. Yeah, when I got married, I went to work the next day, and we took our honeymoon a year later (when we could afford it) and we vacationed (for one week) in the exotic climbs of San Diego.

  50. Jesus H. Christ, the whole point of flop sweat when you sign a housing contract or a car loan or a student loan is that you know you’re signing on for a potential world of hurt. The minute you stop thinking about that is the minute you start making really goddamned stupid decisions.

    Gillespie, you’re all win today. That blub kicks ass.

  51. We paid for our own wedding and honeymoon, too. The wedding was modest but memorable, and the honeymoon was a road trip down California’s coast to San Diego and many points in-between. Fortunately, things were good in the Silicon valley in those days, and we were able to cover the costs of the wedding and honeymoon in time to enjoy a first-anniversary “Honeymoon: The Sequel” in Jamaica. The combination of Valley prosperity and prudence in our wedding and honeymoon arrangements led to some great experiences without years of debt. For the latter, we had to go through the Quake of 89, layoffs, and raising a child. Oh well. Everything has been worth it so far.

  52. Don’t get me wrong.

    The out-of-pocket expenses of my honeymoon were paid in cash.

    But having a zero balance on my credit card didn’t mean I wasn’t still paying . . .

  53. It’s like economic homeopathy…

    That is priceless, accurate, and absolutely beautiful. I had a Chris Matthews shiver.

    I didn’t know it was Dr. Gillespie. No wonder witty, snarky, crushing beat-downs using the English language come so naturally.

  54. Alice Bowie is single-handedly driving the oven mitt market with this thread.

  55. The whole idea that a “house” gains value is moronic. It only gains value relative to inflation in the market. Otherwise it’s just another piece of crap that is subject to the laws of entropy, just like everything else in the universe.
    The stupidity of treating said house like a revolving charge account just speaks for itself.
    I have a hard time seeing bailing on a bad deal as being any more despicable than the other side entering into such a contract in bad faith in the first place.
    Anybody that thinks they can loan the same dollar out 10 times and can get “them” all back is nothing but a goddamn shyster in the first place and desrves to get hosed. Fuck the banks.

    1. The whole idea that a “house” gains value is moronic. It only gains value relative to inflation in the market. Otherwise it’s just another piece of crap that is subject to the laws of entropy, just like everything else in the universe.

      Until humans start colonizing other planets and the ocean floor, usable land is finite. So the notion that real estate increases in value as populations grow is pretty basic and not moronic. Now if you’re talking about people purchasing real estate for the sole reason of believing it will appreciate due to past appreciation and free money, then yes those people are moronic.

      1. “Until humans start colonizing other planets and the ocean floor, usable land is finite. So the notion that real estate increases in value as populations grow is pretty basic and not moronic.”

        Except that technology and social custom (or legal restriction) can profoundly affect the population density per unit of land. Cities, especially those surrounded by natural barriers (such as water, mountains, etc.) tend to expand UP because building technology allows, or because zoning prohibits outward expansion. But they can only grow UP so far, before the ability of technology to support that growth fails, or zoning is adjusted to “preserve the view,” etc.

        The value of real estate is whatever someone will pay for it. Someone who has a feasible plan, for instance, to build higher-density, high-rising rental property on a few acres of land, so that he can charge reasonable rent to hundreds or thousands of tenants, will be able to pay more for the parcel than most individuals who seek only a family residence. If there were little or no competition for the land, the rich individual could get it for a song, but because the developer (ultimately) has the wealth of multiple rents to back him, he can outbid most individuals — pushing the “fair market value” of the parcel into the stratosphere — and still realize a handsome profit when all the dust clears. That is, unless the local government is persuaded to enact or change zoning (or enact similarly constraining regulations), so as to prohibit high-density land use.

        As far as I have ever been able to determine, most of our “population problems” can be traced to someone’s decision to restrict resources: land, land improvement, land use money, water, industrial production of construction materials, occupation density, etc. Very few ever seem to come from people crowding together stupidly and overbreeding until someone realizes that a crisis is underway — the phenomenon that always seems to be at the business end of the politicians’ blame-pointing fingers.

  56. Fred works hards because it’s the easiest way for him to get a cave jam-packed with modern appliances, a pedal-powered automobile, and slabs of bronto ribs so freaking excessive they flip said car

    Add to it the fact that Fred, as an early adopter of all sorts of technologies, must’ve paid a shitload for all of the above.

    I was in the same boat. In my mid-20s I ran up my credit cards to nearly $40G. Dumb, I know. Then I changed my lifestyle, moved back in with my parents for 2 years, and paid the damned things off. Haven’t carried a balance since.

    I’m not going to lie and say that I never considered bankruptcy, but I can honestly say that I never *seriously* considered it.

    Yet the more I see the government pissing away our money to bail out these assholes, the angrier I become. I’m starting to believe that the United States is winding down as a viable concern, and the elites know it, and they’re just pillaging what’s left of it while eyeing the nearest exit. They shouldn’t get their hopes up – I’m perfectly willing to nuke Bermuda and any other place they flee to.

  57. I am not sure I understand the economic theories intelligently (mostly) discussed here. I do understand that once I borrowed money I had to pay it back. Best not to borrow too much. Once we remove the threat of payback what’s the incentive not to give a good goddamn about borrowing more than one can afford and / or not paying any or all back? Rhetorical question I know.

  58. We financed the fun via credit cards and it took us, all told, five or more years to pay off the goddamned balance.

    Wow, you are our exact opposite. We had a very small wedding at my wife’s church, and honeymooned at home since we were out of work (though we still had some business and investment income). We accumulated no debt, and we’ve been putting away half our income since finding employment.

    But, different life choices aside, the important thing is recognizing one borrows money with the expectation of paying it back.

  59. Some of us knew Obama was going to be a fiscal trainwreck and so didn’t vote for him… Almost as though national finance is more important than class solidarity and hating Caribou Barbie.

    Weird, huh?

  60. Oh, and great piece Nick.

  61. Nick: awesome rant. Commenters: all good, even Alice. But let’s give special props to Ken Schultz, who truly “gets it.” Notice something? When people have skin in the game (moral hazard, chance of loss) they actually *do the homework*. Not just “learn a lesson” after the fact; they conduct due diligence, market analysis, etc. They price the opportunity ex ante. Which by definition prevents a bubble. The point of inflicting pain now is to force better behavior in the future. Without that feedback, no market can work.

  62. …with great debt comes great responsibility to pay it back.

    Unless you’re a Democrat.

  63. My son bought a home that was a little below market value at the time. It is now worth 40% of what he paid for it. Until Frank, Dodd, Walters, Gorelich, Reno, Raines et al go to jail, I don’t care that he is walking away.

    The mortgage was with the bank (IndyMac) Schumer caused to crash. Soros and Michael Dell are part of a group that bought the mortgages for 70% of value. To see what a swindle is in progress, see
    http://petersantilli.com/2010/…..the-coals/

  64. It is absolutely right and beautiful.

  65. The combination of Valley prosperity and prudence in our wedding and honeymoon arrangements led to some great experiences without years of debt. For the latter, we had to go through the Quake of 89, layoffs, and raising a child. Oh well. Everything has been worth it so far.

Please to post comments

Comments are closed.