Thursday, June 26, 2008

Mortgage Bailout Plans Bad News

If you read the Oconee County legal organ, the Oconee Enterprise, you'll notice that the numbers of foreclosures have grown significantly this year. Many of these are established homes occupied by individuals who have been unable to pay their bills. Undoubtedly, these are sad situations for the owners and occupants of these homes. Other listings are for undeveloped lots or unsold homes in some of Oconee's new neighborhoods, most notably Coldwater Creek, which seems to have a few listed each week. Despite these notices, it is obvious that the vast majority of people in Oconee and elsewhere have honored their commitments to their banks, and despite the tough times, are still paying their mortgages.

Over the past few weeks and months I have discussed the mortgage situation with various reporters and others, and posted on it on May 21. I have deep concerns about Congress' apparent willingness to wade into the non-fraudulent aspects of the national mortgage situation -- which in many areas is much worse than that in Oconee -- and rescue borrowers who took on a larger mortgage than they could handle as well as the banks who loaned them the money.

Today, details began to emerge in the Washington Post and elsewhere that set off the alarm bells again. If you buy a house you can't afford, why in the world should you get a guaranteed bailout from the government? What does this tell future consumers? Why shouldn't everyone be able to get a government backed, low cost loan? And why in the world should a bank that loaned someone the money -- when it shouldn't have -- be able to avoid the full consequences of that action?

Clark Howard calls this action privatized risk and socialized return -- and I couldn't agree more. He summarizes his point neatly:

"This plan is being sold as a "bailout for homeowners," but it's the lenders who really benefit.

... BoA is using its influence in Washington to get a deal for itself and other lenders from the government -- with taxpayers being put at risk to fund it.

The question remains: Will this move actually help the homeowners who are delinquent? We'll have to wait and see. There's no telling if this is a workable solution for those who got into loans they could never afford.

Most of us who pay our mortgages every month aren't happy about a taxpayer-supported bailout. But there are complicating factors. For example, every foreclosed house in a neighborhood lowers the value of surrounding homes by 1%."

A Wall Street Journal article goes into more detail on the specifics of the bill, and offers some further insights on the situation, including the idea that bailed out borrowers somehow will share profits with the federal government and that $4 billion of community development block grants are involved, which are always a red flag for me as they are often a gift to inefficient urban governments.

Let me say this: anyone who was duped by an unscrupulous lender needs to have a recourse through the government or the legal system. But the healthiest thing for our economy long term is for the borrowers who bit off more than they could chew and the bankers who enabled them to bear the painful consequences of capitalism. And if mortgage lenders were corrupt or misleading to consumers, they should be prosecuted to the full extent of the law and those borrowers should be granted relief.

I admit that I am not a banker. If anyone can make a case for this bill and why it is getting near unanimous support on the hill (other than pure political expediency), please comment below. I'd also love to hear about how else this situation is impacting the local economy from your perspective. To me, it seems as if it's another step towards the erosion of personal responsibility and limited government involvement in business that our country was founded on.


Anonymous said...

I am not a banker or martgage lender, but it's clear that "homeowners" are being "saved" thanks to the lobby and campaign contributions of the mortgage industry and large banks. Just look at FEC reports for Members of Congress and you'll see why 27 Senators refuse to disclose their mrotgage deals. I guarantee those deals will be similar to the sweetheart deals Senators Dodd and Baucus received -- several points below prime!

As for those that are suffering, I am lacking in sympathy for poor financial decisions. Many homeowners didn't want to see the risk and obviously didn't understand what "adjustable" means! When I was "pre-qualified" for $750K, I couldn't understand it. I did the math, and there was no way! Unfortunately, others didn't see the reality.

Still, I agree that long term economic health requires patience, as you mentioned, not an overstep of a government-subsidized "bailout". The warnings were there (you and I talked about them often), but they were ignored. So, now we'll bailout the stupid decisions of the banks and blindenss of homeowners with taxpayer money!

E. Stabb said...

Paul Krugman of the NY Times has written extensively on the mortgage crisis, and he was one of the ones who called it (back in 2005 no less). One of the things I like about Krugman is that he obviously understands the intricacies of economics and can explain them pretty well to a lay person. Even if you disagree with his viewpoint or proposed solutions, his economic explanations of what has gone wrong are lucid and worth reading. He has been very critical of the proposed bailout packages, but is not opposed to some government intervention. I'll give one link below, if you're interested there is a lot more recent stuff on his website, they focus more on the causes and consequences of this.

Part of the equation is that the "tough love" solution might be important in the future for setting precedent, but the short-term consequences to the economy will affect a lot more people than the unscrupulous lenders and the over-their-head borrowers. Put simply, we will all suffer for this, and you have to balance the costs of taxpayer-backed bailout against a recession. Either way you're paying. I'm not saying a buyout is going, I'm just sayin...

I agree with the anonymous poster's shock at what they were "qualified" to borrow. Same story here. We were also disappointed to find that there was really no point in trying to "buy local" for a mortgage, because they are bought and sold like pork bellies. Gone are the days of George Bailey and the Building and Loan. Therein lies the problem. The person you get the loan from is quickly three steps removed from it, and they have every incentive to misrepresent how qualified the buyers really are.

Just to be sure that Brian remembers what a liberal I am, I'll add that this is a perfect example of where government regulation and oversight could have prevented a big mess if done correctly. Just as deregulation of S&L's and accounting backfired, the lack of courage to stand up and regulate an industry clearly operating on the margin has led to a bigger problem than the headaches regulation would have brought. Free market absolutists don't like to acknowledge the painful consequences of "market corrections" and it's vogue to paint anything done by government as "bad", but oversight has advantages too.