Cathy Young writes (emphasis hers):
Lately, there has been a lot of discussion of the moral aspect of anti-crisis measures that, in effect, allow people to get away with bad or at least irresponsible behavior — specifically, bailing out homeowners who took out mortage loans they couldn’t realistically afford. […]
There is, however, an alternative to letting the foolish and reckless go under — taking a few of the wise and responsible down with them — or forcing other, more responsible people to pay for their folly.
Provide the assistance — but in the form of loans. Let the people, companies, and states on the receiving end of taxpayer-funded rescue repay the money later, when they’re back on their feet. At low interest. Or even zero interest. But there should be no such thing as a free bailout.
Looking specifically at the example of “homeowners who took out mortage loans they couldn’t realistically afford,” I think Cathy’s plan is far worse than Obama’s — because Cathy’s plan, not Obama’s, is the free bailout.
Obama’s plan (pdf link)…
is intended to reach millions of responsible homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly. Millions of hard-working families have seen their mortgage payments rise to 40 or even 50 percent of their monthly income – particularly those who received subprime and exotic loans with exploding terms and hidden fees. The Homeowner Stability Initiative helps those who commit to make reasonable monthly mortgage payments to stay in their homes – providing families with security and neighborhoods with stability.
So it lets people refinance their loans — but they don’t get a free lunch (or a free house). They’re required to continue making payments.
Meanwhile, the lenders are taking a loss compared to what they would get if mortgages were paid at the original terms — but that loss is mitigated by incentive payments from the Federal government. And it’s less of a loss for the banks than if the homeowners default on the mortgages.
Compare that to Cathy’s solution, in which, rather than helping the homeowners out with refinanced loans, the government lends homeowners money to cover the shortfall between what they can afford to pay, and what their mortgage terms call for. This would leave homeowners far worse off, but it would be a bonanza for lenders.
But that would be unfair. Let’s ignore, for a moment, the fact that many homeowners having trouble with their mortgages didn’t act irresponsibly. What about the case of someone who used a subprime loan to buy a house they couldn’t afford, once the adjustable interest rates went up? Sure, they acted irresponsibly — but so did the lender. In fact, I’d say the lender — who should have much more expertise than the borrower — was more irresponsible.
Cathy’s plan would be free money for irresponsible lenders. Obama’s plan — which rescues both lenders and borrowers from the worse consequences of irresponsible loans, but expects lenders to swallow some loss and borrowers to keep making monthly payments — is fairer.
* * *
The above is written under the assumption that under Obama’s program, lenders really do end up making less money than they were owed under the terms of the original mortgage agreements. (I think I read that somewhere, but I can’t find it now.) If I’m wrong about that — if the Federal government ends up paying lenders as much money as they “lose” by refinancing the loans — then Obama’s plan really is a free bailout for lenders.
is intended to reach millions of responsible homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly. Millions of hard-working families have seen their mortgage payments rise to 40 or even 50 percent of their monthly income – particularly those who received subprime and exotic loans with exploding terms and hidden fees.
This statement seems to equate “responsible homeowners” with people who “received subprime and exotic loans”. I reject that, and so do a whole lot of people.
Sure, they acted irresponsibly — but so did the lender. In fact, I’d say the lender — who should have much more expertise than the borrower — was more irresponsible.
First, it’s pretty hard to quantify irresponsibility. Secondly, and perhaps more importantly, I fail to see how this creates an obligation on my part to finance them both with my income.
Judges and juries do this in a large number of civil cases every day.
Actually, there have been some pretty exhaustive studies looking at predatory lending that have shown a clear pattern of lenders and originators deliberately steering prime borrowers towards sub-prime loans for the sake of greater fees. I refer you to the Center for Community Capital (risky borrowers or risky mortgages?). This link goes to an abstract of a study recently concluded that shows the subprime default mess is not so much based on borrower profile but on the originators of the loans themselves. They deliberately steered and pushed people into bad deals. Now, this is not to totally excuse irresponsible borrowing but we must recognize that many people got duped and many people wanted to believe they could have a dream home.
That being said. I think using bridge loans to help close gaps in payments for some borrowers should be considered if they can’t reach the specifications for refinancing. Even with relaxed rules, refinancing still is voluntary on the part of the lenders and their are questions about how effective it will in the most hard hit markets where some homes have lost more than half of their value. In that sense, the bridge loans may be useful to just help keep people afloat.
Also, on the issue of taxpayers putting money into this. By not stemming the flood of foreclosures not only do we continue to let the financial market be batterd but, closer to home, we suffer from the very real effects of neighborhood decay. A rash of foreclosed proeprties bring down property values, encourage crime and other negative externalities. It is in the interest of many localities, states, and yes, the nation, to address this problem vigorously and aggressively. Due to the poor oversight of the past 15 years and a combination of cheap credit, we are now in this mess. Not addressing it really will place us in a very long, very deep, and very hard depression.
Everything Jamaal said.
I had remembered reading a study that found that a majority of borrowers who got subprime loans actually qualified for prime loans, but I couldn’t find it. I know that our mortgage broker pushed very hard to get us to go for an interest-only loan and acted like we were idiots for declining. It’s easy to say that borrowers should educate themselves, read the fine print, and be aware of what they’re getting into – and they should do all of those things – but to act like this is only a matter of personal responsibility ignores how predatory lending works in reality.
My experience may be worthless as evidence, but it certainly jives with the predatory lending practices evidence.
When my fiance and I were first looking for a house some years ago, we were still new to the idea and were just getting our feet wet. We ended up looking at a house that we thought that we could, theoretically, afford.
Now, we didn’t have our own real estate agent… nor had we gotten pre-approved for anything. We were still just looking. But the RE agent selling the property and the loan agent they recommended that we go to both used high-pressure tactics and, in the case of the loan agent, actively lied about what we could afford (and based other statements on the whole “well, you’ll only pay interest for the first 5 years!! Yeah, payments will go up after that, but you’ll have gotten a raise by then, RIGHT?” and “Well, you’re going to end up refinancing before then anyway!!”).
We backed out pretty quickly. I respond to high-pressure sales in one fashion, fortunately: walk away. Other people don’t.
I also had just started to see the first early reports about variable-rate loans costing people their homes and driving them into bankruptcy. Other people hadn’t.
The loan-system is purposely designed to be as arbitrarily complex and confusing as possible (specifically so that the loan industry can make so much money off of it). So when someone who is supposed to be an expert… someone who is SUPPOSED to be working for YOU… tells you that “such-and-such a loan” is not only a good idea, it’s “the only SMART idea”, then you are prone to accept that statement as reasonable and, likely, true.
And the only people YOU know that have experience with this sort of thing are usually your parents, or aunts and uncles, or grandparents. And most of these people bought their homes XX years ago… which means all of their experience has absolutely no bearing on how things are done now. So it sounds as good to them as it does to you when your broker or agent says that the variable-rate exotic loan is the way to go.
And that is exactly what these lenders were doing. They were actively misinforming their clients, on purpose, in order to sell a loan. Even (as other posters have pointed out) selling viable clients a BAD loan instead of the SAFE loan because it was worth more money in the short term for them.
So anyone that claims that the homeowners are the primary or even majority “blame-sharers” because they “didn’t do enough research” or “clearly bought houses that they couldn’t afford”, clearly lacks any real understanding of what actually caused the sup-prime mortgage meltdown. These homeowners were actively LIED to about what they could and couldn’t afford and how their loans actually worked. And if they went to another agent? They got told the same thing by that guy, who was equally eager to get his share of the pie.
If a car dealer sells you a car, telling you that the car is in good condition, only has a 1000 miles on it, and has had the engine thoroughly overhauled, and you later find out that this is all a lie (usually when the car falls apart and the engine explodes and you find out the odometer has been reset TWICE)? They have LEMON laws to protect car-purchasers against that sort of thing. It’s considered the LIAR’S fault.
Why is it different for homeowners? Why is it that when THEY are lied to, it’s somehow THEIR fault?
I eventually DID buy a house, by the way… just this last year, after prices dropped to the floor and right before the banks started to melt, and I absolutely knew that I could afford to buy. But not everyone has the luxury of hindsight.
And the only people YOU know that have experience with this sort of thing are usually your parents, or aunts and uncles, or grandparents. And most of these people bought their homes XX years ago…
Or worse yet, you’re the first person in your close and still-living family to have bought a home in the U.S., because your family was poor or you’re an immigrant.
There appear to be two common misonceptions.
First, “subprime” doesn’t mean “nasty,” “poor,” “stupid,” or “can’t afford it.” It simply means “different from a standard mortgage”
Did you just graduate law school? Do you have a good job, have you been working there for a month, but do you not have any income history?
Subprime.
Are you self employed? Do you make a good income, but one that’s difficult to show on paper?
Subprime.
Did you get a great deal on a house, such that a reasonable risk analysis (even a conservative one) would support your stretching to leverage your equity?
That stretch makes you subprime.
Did you have a problem with your credit a few years back which is now solved?
Subprime.
And that’s not even the bad bets. Plenty MORE people made a rational and often conservative choice to use mortgage securities with variable rates of interest. Then the interest rates went through the roof at the same time the housing market tanked. Other people got fixed rate mortgages. Then they lost their jobs.
Should folks have predicted not only the normal variance in the real estate market, but a complete taking? Should people have predicted not only a normal decline, but a real live recession?
I didn’t. Before you blame these folks, did YOU sell your house in 2007 and buy gold in early 2008? No? Well, then, anything that happens to you as a result is entirely your fault, right?
And that doesn’t even cover the predatory lenders. mortgages are complex as shit, and unless someone happens to get lucky and hire an attorney who actually works with them, they are likely to be told “sign here” and then they’re hosed. And yeah, yeah, nobody should do that… but people do do that, and it is a big problem, which is why we call it “predatory” and not “borrower’s fault.”
So tomorrow morning I am meeting yet another client who is about to be foreclosed. From my initial conversation it looks like her husband lost his job. Their house will soon be gone, unless I can keep them in it–which I probably can, at least for a while, to save them paying rent–and it is pretty brutal.
If a car dealer sells you a car, telling you that the car is in good condition, only has a 1000 miles on it, and has had the engine thoroughly overhauled, and you later find out that this is all a lie (usually when the car falls apart and the engine explodes and you find out the odometer has been reset TWICE)? They have LEMON laws to protect car-purchasers against that sort of thing. It’s considered the LIAR’S fault. Why is it different for homeowners? Why is it that when THEY are lied to, it’s somehow THEIR fault?
Good question. Why is it different for homeowners? Why is it that when someone is lied to when they buy a car their relief is to use the lemon laws (and others) to either criminally prosecute or sue the seller, but when this happens with a home their relief is to take money out of my pocket to cover their losses?
I don’t think that it’s the homeowner’s fault if they were actually lied to in these transactions. But saying that they shouldn’t have access to my money to make their losses good doesn’t mean that I think their problems are their own fault.
Now, in instances where people caved to high-pressure sales tactics, sorry; that’s how it goes. It’s up to you to recognize that and resist them. Same thing for people who went into the market with inexperience and were taken advantage of. It’s a sad thing, but that doesn’t justify taking my money.
Sailorman:
You present a number of scenarios wherein people couldn’t get a conventional loan and thus went and got subprime loans. But presenting this situation as conventional loan vs. subprime loan ignores an alternative: rent. I was married in 1973. It wasn’t until 1986, 13 years and two children later, that I bought my house. I rented that long because I couldn’t afford to buy a house. If someone got involved in some sub-prime situation because they couldn’t afford a conventional loan they should have continued to rent, like I did. To stretch their finances to the point that if things turned sour they couldn’t stay in their home and then expect to take money from me to keep them in their home is greedy.
And that’s not even the bad bets. Plenty MORE people made a rational and often conservative choice to use mortgage securities with variable rates of interest.
I wouldn’t call a choice where the answer to the question “What will my interest rate be on this loan 3 or 5 years from now?” is “Who knows?” a conservative choice. At all.
Other people got fixed rate mortgages. Then they lost their jobs.
O.K. That happens. Shit, it could happen to me. Let’s say it happens to me. I have some savings that might keep me in the house for a bit. Seems to me that if I don’t have such savings it’s my fault, not yours and certainly not the taxpayers. Tell me again why I would be justified in taking taxpayer money to stay in my house. I don’t see it.
People bought homes they couldn’t afford. I saw it all over my neighborhood. I and my wife often wondered “What’s going to happen to these people if we have a recession?” We figured there’d be foreclosures, etc. We never figured, and would have laughed out loud if you had suggested, that the answer would be “You’ll pay more taxes to cover them.”
RonF,
As some one who works in the financial industry (and I work very hard for what I have), I agree with you a thousand times over. I see the same kinds of complaints every day; investors knew the risks and read the disclosures, but when things went sour, they felt entitled to some kind of coverage for their losses. This isn’t how the world works, people.
Also, while the lenders deserve some of the blame for all this, as RonF said, the borrowers aren’t off the hook. They know better than anyone else their financial situation. All the disclosure in the world wouldn’t have chased away the kind of greed we saw before this crisis. That’s not my fault, and while it seems callous, it shouldn’t be my problem, either. I would expect the same kind of attitude from others if I had taken such a gamble with my life and money, by the way.