I’m with Howie on this one Posted by: McQ
on Friday, August 24, 2007
Let's not all fall for the "home owner is a victim" schtick on the subprime mortgage kerfuffle:
Memo to the media: Everyone who is defaulting on a home mortgage is not necessarily a victim.
I feel sorry for anyone in that situation. Losing a home is an awful thing. Some were undoubtedly pressured into buying by unscrupulous lenders. Too many greedy players on Wall Street got away with making shaky loans for too long. They sliced and diced mortgage debt into increasingly exotic paper and lost sight of the risks involved, figuring the Fed would bail them out if things got out of hand.
But let's face it: Most of the people who took out home mortgages for no money down knew that this was a roll of the dice. Who gets to buy a house without a down payment? And most of those who took out adjustable-rate mortgages knew that their rate would balloon in a couple of years, and could do so at a level that would be hard to afford. They took the risk anyway. No one forced these folks to take on big mortgages they could barely handle.
Look, I'm no economics major, but I've had one adjustable rate mortgage in my life, and I figured out that it was appropriate at the time. Interest rates were at 10% or there abouts. Made sense then. The market really had no place to go but down and if it went up, I'd probably have suffered no more than the equivalent of the prevailing prime when I took the mortgage. As it turned out, it went down the entire time I held it and I ended up paying a subprime rate.
But this last mortgage came at at time of historic lows for interest rates. Why in the world would I want an adjustable when, historically speaking, the rates had no where to go but up. And, given the world situation and its effects on markets, it could go up quickly. 5+% fixed made sense.
Now, like I said, it doesn't take an economics major to make those sorts of simple calculations. Nor does it take one to figure a worst case scenario if they choose a sub-prime mortgage, assume a rise in rates and adjust their housing choice's cost to reflect that worst case (and still be able to afford the house if it happens).
So while I agree that some of this crisis is the result of greedy characters pushing the loans, in most cases they had willing 'victims' who figured they could get away with buying more than they could afford with a fixed rate mortgage. They gambled. They lost.
We'll now see a sell off, housing prices will dip for a while, the market will adjust and hopefully those burned by their actions will learn.
Or will they:
Perhaps inevitably, Hillary Clinton has now proposed a $1-billion fund to help struggling families catch up on their mortgage payments, and John Edwards also wants to give money to those who can't make their payments. So the taxpayers should bail out folks who took out these loans with their eyes wide open?
No. But unfortunately it is the same mentality at work here which finds it the job of government to subsidize flood insurance so people can repeatedly build houses on barrier islands which lay in the path of hurricanes.
Let’s not forget the responsibility of politicians who forced the Community Reinvestment Act which led to the conditions under which marginal borrowers were allowed to take on financial burdens they couldn’t handle. Now that the chickens are coming home to roost, these same politicians are just appalled, appalled I tell you, that greedy moneylenders could put poor homeowners in that position.
Dave and the wolf are right on both counts. There’s plenty of blame for this mess. But, having been on the lowest end of the income bracket (somewhere way below poverty level) and having worked our way up... I have little sympathy for people who get themselves into these types of messes. They always have excuses, but what it comes down to is, they want to live beyond their means.
In the end - the rest of us pay for it, because they certainly can’t. It took me too many years of living with nothing, working and scraping to get by, to have any empathy for those who overspend then cry when the bill comes due.
While I know we can’t just let everyone totally sink (for the reasons Dave gives), I must say I find it tremendously galling to think my husband and I not only worked our way up (our first house ended up being a neighborhood controlled by gangs with the highlight of drive by shootings), now WE get to pay for others too. Fabulous - what’s wrong with this picture. Where was Hillary when we were stuck in a bad neighborhood and had to actually... save money to work our way out?
You are all correct, nothing is owed to these people, and nothing should given to these people by taxpayers.
As to whether it would be good for the bottom line for lenders to stabilize their rates, that’s another question.
If a mortgagee has been paying on ARM perfectly for 5 years, and the payment before the rate adjustment would be the last payment they ever see, in a down real estate market, it may be in their best interests to make an effort to keep their payments where they are. It might sound good for a company to get $2000 for a 200k loan, but the reality is that they will often get $0 and own a house they don’t want.
If the Fed pushes rates down, and lenders make an effort to stabilize these sub-primes and other ARM’s, when rates DO go back up (and of course they will, economic cycles being what they are), we may avoid the worst of a potential foreclosure crisis.
But this should be a companies decision, not the governments.
What so many people do not understand is that a foreclosure costs a mortgage company on average $80,000. (Source: National Association of Mortgage Brokers) Then they are stuck with the property and have to find a buyer.
For the past few years, that has not been a deterrent because the market has gone up and properties are still profitable even with the forclosure and the costs associated.
But now in a down market, the hurts goes both ways. First the $80,000 forclosure cost and then the $250,000 home won’t sell for more than $175,000.