Generation X Finance thinks the mortgage bailouts encourage irresponsibility and punish prudent borrowers. His article references an interesting story from CNN money that says many other people agree as well.
Subprime bailouts are good for irresponsible lenders and irresponsible borrowers. They're bad for taxpayers, would-be home-buyers, and the economy. And they're unfair to prudent borrowers.
Just so you know what we're talking about, Countrywide is currently voluntarily restructuring subprime ARMs that are about to reset, many of which could go as high as 10.5%. What are all these subprime borrowers getting in return?
30 yr fixed rate loans at 5%.
That's right, subprime borrowers are being rewarded with lower rates than are currently offered to the best prime borrowers. Nice. Maybe I should have gotten an ARM for a condo that cost twice as I could afford--then I could be getting 5% now too!
How can lenders afford that? Government subsidies also known as your and my tax dollars. So I am stuck with the 6.375% mortgage on exactly the condo I could afford while Sally Subprime is getting 5% on hers with help from some of my tax dollars. Again, nice.
Foreclosures A Greater Sin? Lets forget about the unfairness of it all, though. Countrywide reps say that these bailouts are necessary to avoid the "larger sin" of allowing the houses to go into foreclosure, which would drag down home prices. At first glance that sounds reasonable, but if you think about it, the only group that would really be hurt by the foreclosures is the lenders.
Home prices need to come down! They shot up due to irresponsible lenders and borrowers--not due to real appreciation in most cases. Now prices are being held artificially high by these bailouts rather than being allowed to adjust downward like a free market would accomplish. We're all trying to protect the subprime borrowers from losing their homes, but what about all the responsible people who are saving for a home but have now been priced out of the market?
Lenders should be allowed to lose money, and borrowers should be allowed to default. It's called a free market.
What do you think?
November 8, 2007
Subprime Bailouts: Why Lenders and Borrowers Should Be Allowed to Lose Money
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8 comments:
It's important to distinguish between a government (read: "taxpayer") sponsored bailout and a Countrywide sponsored bailout. I have no interest in contributing a single dollar of my own to the bailout for all the reasons you mentioned, and because a bailout makes a repeat of the behavior more likely. Lenders and borrowers need to know that if they f* up, the government isn't going to bail them out so that they'll be more careful.
So far, however, it doesn't seem like a significant government bailout is in the offing. Countrywide, on the other hand, can do whatever they want at their own expense as far as I'm concerned. Allowing them to fix their own mess provides exactly the right type of deterrent against poor risk assessment by the lenders.
Why should you care if Countrywide dips into their own pocket to give your irresponsible neighbor a better rate than yours? It has no impact on you. If it really bothers you, you can console yourself with the knowledge that many of the bailees will still be eating cat food in their old age, never having changed their spending habits or saved for retirement.
another side effect of lower real estate values are that it would bring lower property tax revenue to your county/state (if your county/state has a property tax). depending on the services that your county/state provides, it may affect you...
I couldn't agree more and I think next year we will be looking back on the Fed's rate cut response as an even bigger failure of the sub-prime mess.
Jemifus-I have read different things about whether or not the government is involved (or getting involved) to help fund the bailouts. In any event, I certainly don't want my tax dollars funding that "cause." But I do care, even if it isn't a government-sponsored bailout. I think it's bad for the economy for housing prices to be held artificially high so that people can stay in homes they can't really afford.
Anon-good point about property taxes. However many areas have caps on how much property taxes can increase in a given year, so I doubt it's too much of an issue--in places like CA (hit worst by this housing speculation and run up) some people are literally decades away from paying taxes on the full value of their homes since prices have run up so far so fast.
Frank-I do think this housing situation has caused a ripple effect which always has unintended consequences. The fed decisions, the stock market, consumer sentiment all are affected by the subprime problems. That's my primary concern about a bailout--we cannot predict all the consequences.
30 yr fixed rate loans at 5%. !!!!
I'll take it. Honestly, it's sounds too good to be true
The problem with not having a bailout is that the lenders don't hold the original mortgages. They were tranched and sold to other investors (generally with sketchy and less sketchy mortgages all bundled together). When the subprime loans go bad, the investors holding those notes suffer. Mortgage loans make up a fair amount of investment accounts, even in investments that are considered less risky (like CDs). Basically, it means the subprime borrowers and fraudsters have sort of peed in the greater investment pool, and a lot of innocent people are going to suffer to some degree because of this. For the record, I DO NOT support a bailout. What would be ideal would be if the lending rules were changed so that mortgage loans couldn't be bundled and resold unless they were fixed-rate investments. This would cause any sane bank not to lend funds for mortgages that they didn't think would be repaid. Right now there is too much moral hazard in lending and immediately reselling mortgage loans.
Good point, Dimes! I didn't consider the bundling and reselling of the mortgages in my post. Thanks for visiting the blog!
I am stuck with a 7% fixed rate mortgage from 1998. In 2004, I attempted to refinance to a lower rate, 4.7% fixed. But I was turned down. Not because of credit or income issues..... but because I DIDNT OWE ENOUGH ON MY HOUSE.
So now, someone who bought a home that was well within her means, has never missed a payment in 10 years, and who has added value to her home via renovations is still stuck at 7% while those who borrowed more than they could afford, and have done nothing to the property to reflect true increases in home prices get 5% FIXED????
It makes me angry. I understand the overall economic implications which is why I at some point realize that it must be done, but I am still angry that I could not refinance to a lower fixed rate because it "wasn't worth it to the bank at such a low principle balance", but these people get a lower rate than I have.
So much for being responsible.
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