Free Markets, Free People


Is The Obama Mortgage Solution Just More Pain Avoidance?

As you recall, the following is partially blamed for getting us into the current housing crisis:

Ever since the credit crisis began, a lot of blame has been heaped on adjustable-rate mortgages, home loans that recalibrate according to market fluctuations. One brand of these innovative mortgages that have come under special criticism has been so-called “exploding A.R.M.’s” that lured borrowers with unusually low teaser rates that then reset skyward a few years later. These have often been derided as predatory, and lenders who offered them accused of luring homeowners into buying homes they couldn’t afford for the long-term.

So is the Obama administration, with its $75 billion mortgage bailout, any better than those previous lenders who were described as “predatory”? Well not according to the plan he’s put forward:

Critics of these might want to check out the Homeowner Stabilization Plan put forward by the Obama administration today. The plan would reduce mortgage payments and interest rates for homeowners who have seen their payments rise to more than 38% of their monthly income. But those reductions last just five years, after which they begin to reset to higher rates. In short, Obama is just drawing out the teaser rates a bit longer.

During the next five years, the Stabilization Plan will encourage lenders to lower loan payment below 38% of the owners’ income and provide subsidies for banks that lower the payments to 31%. The actual rate of payment will be even lower, since the government will also pay homeowners with the reduced rates $1000 a year to stay current on their payments.

After five years however, those government sponsored adjustable-rate mortgages will reset. The Obama adminstration promises they will reset at a moderate phased in level. But the loss of both the subsidy and the $1000 payment will automatically make the monthly payments much more expensive. What’s more, many market watchers expect interest rates will be much higher five years from now, putting additional pressure on mortgage rates. We could, in short, simply be prolonging the housing crisis.

Nothing like kicking the can down the road 5 years is there? The hope, obviously, is that Obama is safely in his second term when this new crisis hits, and, of course, by then he can safely denounce those who default on their mortgages again as people who were given a chance but didn’t take advantage of it.

Now obviously the people who get this “help” can sell their homes in that 5 years (and, of course, that was the idea when many of these people took out the low adjustable rate loans previously – a quick flip. But the market tanked.). However, it will be a buyer’s market in the coming years. So there’s a very good chance that in 5 years we’re going to see the very same problem we have now resurface.

So what are we doing with this 75 billion?

More pain avoidance which, it appears, will simply prolong the problem.

~McQ

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13 Responses to Is The Obama Mortgage Solution Just More Pain Avoidance?

  • Perhaps im missing a point here, but how could a lender EVER be predatory? Does he make money from a foreclosure? I cant believe one does, so how is getting someone in a loan they cant pay back advantageous to a lender? I wish someone would ask that question to the dummies who ramble about it, because the only true answer is that they had a advantageous reason to do it….the government said they would guarantee the damn loans!

  • First – did you catch the CNBC video link on Drudge?  it’s classic: http://www.cnbc.com/id/15840232?video=1039849853

    Second – a lender can be predatory in several ways – not disclosing costs, taking someone who doesn’t understand finance and having them sign on for loans that any reasonable person could see won’t work.  Unfortunately not everyone is equiped with the necessary skills – normally a bank wouldn’t touch such a person – but a predatory lender would seek such people out and then banks were dumb/greedy enough to not care…. those people should go to jail, they are preying on society.

    • I’m not a financial expert by any means, but it strikes me that there are a couple of problems with this statement:

      BillSSecond – a lender can be predatory in several ways – not disclosing costs, taking someone who doesn’t understand finance and having them sign on for loans that any reasonable person could see won’t work.  Unfortunately not everyone is equiped with the necessary skills – normally a bank wouldn’t touch such a person – but a predatory lender would seek such people out and then banks were dumb/greedy enough to not care…. those people should go to jail, they are preying on society.

      If a lender doesn’t disclose costs, that’s not “predatory lending”; it’s fraud, i.e. actually criminal, no?

      But lenders who loan to people who aren’t “equiped with the necessary skills“… What does that mean?  My own understanding of loans is pretty much limited to “don’t borrow more than you can comfortably pay back”, “low rates good, high rates bad”, “make payments on time”, and “avoid variable rates”.  It strikes me that these are pretty simple concepts that anybody with an IQ higher than a sea sponge can understand.  I suggest that those people who are being bitten by the mortgage crisis fall pretty much into one of two groups: (A) those who bought property as an investment and didn’t care about having an ARM because they intended to flip the property before the rate went up but got caught when the market tanked, or; (B) people who take loans and really don’t care about paying them back, i.e. people with lousy credit ratings.  Yes, there are people who are suffering because they lost their jobs and hence have trouble paying their mortages, but this happens in any economy and normally wouldn’t be a “crisis”.  Banks will generally work with such people even without government pressure because they realize that the customer is basically “good” and will pay when they can, and anyway the bank usually loses money when it has to foreclose.  Obviously, they don’t want to do that.

      So, it’s hard for me to swallow the whole “predatory lender” meme.  The culprits I see are politicians who pressured banks to make risky loans in the name of “fairness”, made hollow promises that Uncle Sugar would back those loans if there were problems, and now are ripping off taxpayers to kick the can down the road.

      • docjim ,
        in short you say well some predatory practices = illegal practices – agreed.  Here’s the rub can you prove the guy who set up a $600K loan for a retiree with $50K of income lied to the retiree?  Can you assume that a 75 year old man is going to recognize he’s being preyed upon.  Scammers take advantage of the elderly every year – however, in this case those scammers turned around and said to a bank – hey, this guy took out a $600K mortgage – want to buy it from me – you can always sell it to Fannie/Freddie and manage the risk…. so the banks gave the scammers a perfect scenario – they scam the consumer first and then scam the bank who is relying on Fannie/Freddie actually not just relying but required to support…

        net result a mess of bad loans – as the clip notes some of these people can’t afford their loans even if the loan was at 0% or -2%… they need to be evicted or someone needs to go to jail for a crime and be forced to pay down the amount that individual was given illegally.  Many used the money for medical expenses – nothing like a chemo addled brain or worried spouse/parent/child to not pay attention to the details of a financial transaction and for the money to now be gone.

        Don’t get me wrong they don’t deserve the money and most don’t deserve much other than a good kick in the butt.  So while I think that ‘predatory loans’ are part of the problem I don’t think the solution is to just forgive the person who was taken advantage of either since they obviously managed to use the money.

        • BillSHere’s the rub can you prove the guy who set up a $600K loan for a retiree with $50K of income lied to the retiree?  Can you assume that a 75 year old man is going to recognize he’s being preyed upon. 

          I’m no happier about people losing their shirts than anybody else, but this business of blaming “predatory lending” seems to me to be a red herring.  As I understand it, the law assumes that any adult, unless legally judged mentally incompetent, can enter into contracts and assumes a degree of risk when he does so.  Naturally, if it can be proved that the contract is somehow fraudulent – which, as you say, may not be possible – then the person committing the fraud ought to be prosecuted. 

          However, I don’t think that is the case in so many of these bad mortgages.  Rather, people snapped at what appeared to them to be a great deal and didn’t bother to think what could happen down the road.  Nobody enticed them with bribes, hookers, booze, or drugs.  Nobody put a gun to their head and forced them to take the loans.

          BillSMany used the money for medical expenses – nothing like a chemo addled brain or worried spouse/parent/child to not pay attention to the details of a financial transaction and for the money to now be gone.

          I’m very sorry for people who took the loans without really understanding what they were doing, but that doesn’t remove the responsibility from them or shift it to the lender.  Do you suggest that lenders be required to conduct psychological evaluations and reject potential borrowers who show signs of mental distress?  Intelligence exams to reject people whose low IQ indicates that they are probably incapable of understanding a loan agreement?  And should we extend this sort of hyper-due diligence to the rest of the market?  People make stupid decisions all the time; do we really want to set up a system in which some Big Brother constantly looks over their shoulder and stops them doing things that are judged “foolish”, “risky”, or “bad”?*

          I would be much interested in seeing a detailed study of the people who have defaulted on their mortgages.  How many of them had lousy credit scores and would never have gotten a loan had the banks not been pressured by Washington to give them out?  How many were buying property merely as an investment in a bull market but got caught with an exploding ARM when the market tanked?  How many approached their banks and tried to work out a deal when it became apparent that they couldn’t pay their mortgages, and how many did the “jingle mail” routine and simply stopped making payments (there is a piece of democrat trash in Congress who did this)?  All I’ve seen from MiniTru is sob stories about people who were “tricked” by a heartless lender and are now being thrown into the street.  But I happen to know of people who just decided to stop paying their mortgages and REFUSED to even attempt to negotiate with the bank.  Yeah, their credit record was trashed, but they got to live rent-free in their homes for months while the bank went through the foreclosure process.

          The sad thing is that, as McQ points out, TAO is setting the system up for a repeat.  Further, he’s asking for $200 billion for Freddie and Fannie, the two entities that had so much to do with creating this problem in the first place.  Perhaps he’s making some serious changes in the rules that govern those entities, but I doubt it.  Like many other politicians, the current system is pretty good for him and his cronies: he can still pressure banks to make risky loans in the guise of “expanding the American dream” but not be responsible if things go sour.  Pretty sweet deal.

          ———

          (*)  This is the same logic behind the ridiculous war on fast food: people are considered too dumb to realize that scarfing a double cheeseburger, large fries, and a large coke for lunch five days each week will probably make them fat.  It’s the restaurants’ fault!  Predatory selling!

          • docjim,
            I think in general we agree more than we disagree. 

            My point was that predatory lenders do exist.  Look fact is in 90+% of the cases ‘it takes two to tango’ and the ‘predatory lender’ wasn’t preying on the loan applicant as much as the government rules.  -making the victim of the predator – you and me the taxpayer.

            The core change has to be to stop those predators who can use a somewhat unwitting carrier (loan recipient) to help them make money.  Fact is those people who took 600K in loans they could never afford – yeah we still have them and they still can’t afford the loan, but the guy who set them up and took 5 or 10% off the top – he’s still got his money, and we haven’t stopped him from doing the same thing again.  So now we’ve got a bunch of bad loans and the threat of the predator’s return… long term I’m less worried about the existing loans and more concerned with fixing the system to prevent a repeat.  You may call that big brother but those are truth in lending and credit limit laws that ensure that the rest of us don’t become the mark when the loan broker and loan recipient set up a scam or the loan broker sets up a mark and they pull mega-dollars from the combined wealth of our banking system leaving the rest of us holding the bag.

  • But i fail to see how doing such a thing is advantageous to the lender, outside of the guarantee from government.

  • I pay my rent on time. I get no help with that from anyone. If The Clown™ thinks that he is going to take my tax money, turn around, and hand it to people who cannot pay their rent/mortgage, for whatever reason, then I think that I should stop paying taxes to this criminal in the White House.

    Fugg The Clown™ and His Clownettes™. If they want me to pay for someone else’s bad behavior, I am headed to Boston to start another Boston Tea Party. Maybe we can collectively toss this illiterate pr!ck in the White House right in the drink.

  • I have to tell you, Bruce, I don’t even think this thing rises to the level of pain avoidance.  to be called that, it would actually have to accomplish something other than spending money.  As it stands, the only thing it does other than spend money, is gives Obama and the democrats the opportunity to say “see how much I’m doing for you?  “… All ignoring of course, the fact that they’re doing it with taxpayer funds. 

    Within the last 48 hours, I have become convinced that Obama and the democrats have reached the anger tipping point with the American electorate.   That’s quite an accomplishment, and given that it took bill Clinton most of the two term presidency to achieve that landmark.  Obama as been successful in reaching it in 30 days or less.  We’ve still got nearly 1500 to go.

  • This problem will take a generation to get out of. First, there will be a glut of foreclosed homes. Second, there will be hundreds of thousands of Americans who will not be able to get credit to buy homes because they walked away from a mortgage. Third, just the general shape and structual change in the US economy – it will never look like the post WW II zenith years again. Fourth, creditors will once again be required to inspect applicants like they did in the 1950′s and 60′s – go to their place of employment for vertification, take up to 90 days, 10% down, etc.

    The US will come out of this economic depression a completely change and unrecognizable nation. Obama’s plan is too much, too late because the damage is done and irreversible. the current adminstration is having too much fun campaigning and speechmaking to get bogged down governing. Face it, Obama is a figure head president. He can play the part but the real power is in the House of Representative with Speaker Nancy Pelosi who annointed Mr. Obama nominee and president by her strategic threats to congressional super-delegates in the Spring and Summer 2008. Analyze the “economic stimulus’ bill and find out that Obama had nothing to do with it. He apparently was elected to be the spokeperson for Speaker Pelosi.

    Danny L. McDaniel
    Lafayette, Indiana

  • Banks do not normally buy mortgages from other lenders and then resell them to another party. The predatory lender thing is mostly BS. This is not some fly-by-night aluminum siding thing, this is a highly regulated business usually involving one or more lawyers, real estate brokers, notaries, etc.  I am sure someone may be able to document a small number of abuses, though I have not seen any, but for the most part the predatory lending BS is just an excuse.  Perhaps BillS can provide us with some actual documented cases.

    Does this plan provide any assistance for those who have conventional mortgages who may face foreclosure because they have lost their jobs and cannot make the mortgage payment? People who have been making payments for 10, 20, or more years? Baby boomers, for instance, who are on the verge of retirement and have already seen their retirement funds lose half their value and have little prospect of finding any employment even in a good economy. 

  • Something I never see mentioned in all this is the notion that the banks did borrowers a favor lending them money.  Think about a home loan like an option on home price appreciation.  The borrower buys a put option on the house so that if the price goes down, they can default and put the house back to the bank and walk away.  In some (many?) cases, you could buy this option for no money down.  If the price goes up, the borrower makes money and refinances into a conventional mortgage (if they’re smart) or cashes out through a mortgage equity withdrawal (not as smart).  How many folks were able to take advantage of this in 2002, 2003, 2004 and now own a home which they never would have been able to get into before? 

    But now we have to hear about predatory lending because the folks who took up the banks (very dumb) offer of a free or low cost option ran into the buzzsaw of the first national home price decline since the Great Depression.  Its totally ridiculous.  As already pointed out, if mortgage brokers lied, there are already laws against it and they should be prosecuted.  But the banks doing the actual lending get absolutely hosed during a foreclosure.

  • BillS,

    Yes, I’d say we do agree more than disagree.  Natch, I want people who break the rules to be punished as the law provides.  A lot of people DID make money off the subprime mess (most of them democrats, I believe), and that’s wrong.  But I think it’s important to speak up against the “predatory lenders” canard, because (IMO) that isn’t the root of the problem, and indeed is a useful villain to provide cover for politicos who ARE responsible.