Thursday, September 6

No Bailout for Homeowners in Trouble

Who says the US has no Social Welfare System?

As most of us know, with a couple of exceptions for flippers in denial, there is a huge problem in real estate with homeowners unable to pay their mortgage payments.

As a result there have been increasing calls for the Government to bail out these 'unfortunate' struggling homeowners who are now in a real mess. A mess partly created by those who are in trouble now.

Many homebuyers took out adjustable-rate mortgages to take advantage of low interest payments for the first two or three years. When their rates reset higher after the initial period, those buyers couldn't handle the bigger bills. - Forbes

Stupid. Simply stupid. Especially considering that fixed rate mortgages were at their lowest levels in a long time.

People have forgotten a couple basic facts:

- Your house is not an ATM machine.
- You don't buy something that you can't afford.
- A house is not an investment you trade like a stock.
Now take a look at who will benefit by a bailout:

A presidential bailout of homeowners who can't pay their mortgages would likely be a boon for the companies making the mortgages. Originators like Countrywide Financial (nyse: CFC), Accredited Home Lenders (nasdaq: LEND), and H&R Block (nyse: HRB), which has a subprime lending subsidiary, have been crunched by rising defaults. It would also benefit companies like Thornburg Mortgage (nyse: TMA) that hold mortgages for investment. - Forbes

These are the very firms that thought it was perfectly fine to approve loans to people they knew could not afford them.

The basic fact is that many of the people in trouble now knew that their loans would reset in a couple years time. They just figured that they would sell their homes to some bigger fool. Unfortunately for them, everyone had the same idea. That would not have been a problem, except for the fact that none of these people realized that they were the bigger fools.

As we will all eventually learn, this problem is too big to bailout, partly because even with an interest rate of 0%, many homeowners now in trouble would still be unable to afford their homes, because they lied about their income.

Right now we’re seeing 30-40 calls a day. And 85 percent of these families we can’t help, simply because the gap of what they can afford and should have been able to afford is so huge,’ said Ester Cadavid, chief development officer of Los Angeles Neighborhood Housing Services. ‘They bought too much house. Even if we refinance them into a fixed-rate (mortgage), the payment is still too much. - Housing Bubble Blog

Had they been truthful from the start, they never would have been able to obtain the mortgages they are now complaining about. Lets not forget that many committed a crime when they lied to obtain a mortgage.

Another issue in all of this is that a good number of homeowners in trouble own more than one home. Of course they lied on multiple loan applications in order to pull off this feat. Many of these homes were purchased with no money down, so the homeowner loses almost nothing compared to the damage their foreclosure will do to the holder of the loan. (Oddly enough, homeowners in trouble who put down large down payments actually get hurt the most, since they actually have an investment in the property.) Paying only interest on your house loan is not much different that renting, other than a renter can call management when he has a problem with something, or better yet, move away. (Yes, their credit rating is ruined, but that is because it is merely recording the poor quality of their credit-worthiness.)

Lets say there is a bailout. Do you help those who lied? Do you help those who have multiple houses? What about those who used their homes as ATM machines (either through a home equity line of credit or refinanced in order to cash out) and spent whatever liquidity they might have had on vacations and expensive cars and other toys? What about those who used their house cash to pay off existing credit card debt only to max out their cards again? What about those who bid up the prices of houses that they could not afford in the first place? What about all of those properties that were purchased as investments? How about those who paid the lowest payment in a negative ARM loan from day done? What about those who NEVER made a mortgage payment?

What about those people who were just-plain-stupid?

The Orlando Sentinel reports from Florida. “The champagne-popping days are over for Natalie and David Luongo, who banked enough money flipping a South Florida condo three years ago to stage a $100,000 wedding. Should they walk away from the $117,000 deposit they plunked down on another investment condo in the ritzy Miami-Dade enclave of Bal Harbour? Or should they close on the one-bedroom unit, which is similar to others now on the market for less than the $585,000 they agreed to pay?”

“‘It’s painful and scary,’ Natalie Luongo said. ‘We saw the frenzy, and we bought in. Now we’re paying the consequences.’” - As highlighted on The Housing Bubble Blog

Sure mixed in all of this is a minority who is in trouble and probably deserve help. However, there is no saying that they will take advantage of any assistance made available wisely. Really, if you were responsible when purchasing a house, you would have done your best to obtain a fixed-rate loan (which were at historic lows) that way you would have known what your mortgage payment would be every month for the life of the loan and could plan accordingly. That would leave only loss of income or family emergencies to risk making those payments. People in trouble took the riskiest loans they could. That type of behavior does not warrant assistance.

There is another problem here. This housing market is headed down no matter how much money the Government attempts to throw at it. It has grown just too big to the point that most people cannot afford houses at the current asking prices. There is another simple fact in that many of the people in trouble own multiple properties. Renters like myself will be hard-pressed to purchase one house, let alone multiple properties. This is an issue of plain simple supply and demand. And the rest of us are not going to buy at today's inflated prices because we can all find places to rent that cost less than what would be the monthly interest due for buying these houses.

There currently exists ways to end troubled home-ownership. Home owners can either let the house be foreclosed on, they can file for bankruptcy or attempt to negotiate with their lender, or whoever they are sending their payments to, some sort of reduced payment plan. With the value of these mortgages being slashed drastically on the resale market, the newest holders of the loans have leeway to reduce the payback amount to prevent the home 'owner' from defaulting. Then, there is the possibility of attempting a short-sale.

For a whole blog's-worth of examples of why homeowners in trouble should not be bailed out, go read the Bubble Markets Inventory Tracking blog.

For many examples of abusive lending practices, go read Housing Bubble, who comments as follows about a housing market bailout:

Creative financing, no risk assessment, and loose credit created this monster…risk assessment, tighter credit, and traditional financing (fixed rate loans paying principal) will rein it back in. If the mortgage industry and the secondary market didn’t discard risk assessment the past 5-6 years to get these ‘high risk’ people loans, they would NOT be defaulting today. - Housing Bubble

So, What to do to help the Economy?

If the Government is so interested in pouring money into the market to help the economy, then they should give the money to me and the millions of other American who acted responsibly over the last couple of years, while others raced headfirst into this mess.

We have our accounts in order, or are working in the right direction. We are the one's spending within our means. So how about increasing our means? We will make the best use of the money and unlike if the Government were to give it to the idiots, we won't be needing more money in a couple of years (or months). For me, I can go out and finally buy a new car (Mine has 190,000 miles on it.) Hell, I could even consider getting a second one for the wife. We can go out and buy a nice large flat screen TV and a house full of furniture to go around it. Give me enough money, and I'll even consider buying one of these houses that is currently held by a distressed buyer. One thing is for sure, we'll limit ourselves to a house we can afford. If the Government wants to help, then that is how they should go about doing it.

I think that as the housing market melts down nationwide, the calls will become louder not for a bailout, but for placing those responsible in jail. The appraisers, the predatory lenders and the flippers should not be allowed to get away with any criminal activity they might have done. There has not been much enforcement in the past, but I expect that will change as news gets out over the losses these poor-quality loans will generate.

This is surely just the beginning of the story.

P.S. -There should be no change in the Taxation of Forgiven (Short Sale) Income:

This is a bad idea:

Quick example: you buy 450k home. You have trouble making payments. You refi or negotiate with lender and the property is now worth 350k. That 100k that the lender ‘forgave’ is currently taxable as income. But under the proposed change, that would be a free ‘100k’. I know that taxes are a pain (see but why should somebody get a ‘free’ 100k or whatever the amount is, and not have to pay ANYTHING on it. Again, it is another ‘reward’ for making bad financial decisions. - Housing Bubble Casualty

And a little clarification by a commenter on the site:

Another pointed out, “The vast majority FBs will never have to pay any extra taxes even without changing the rules (therefore, this rule change will be worthless). ‘There’s a very important exception to the debt-relief-equals-taxable-income rule. Although lenders must send 1099-C forms reporting taxable income whenever cancelled debt is $600 or more, the tax bill itself is forgiven if the homeowner is bankrupt or insolvent.’ Link here.” - Housing Bubble Blog

There needs to be a price to pay for irresponsible behavior. Take gambling at Las Vegas. Sometimes you win, sometimes you lose. Most people will walk away as losers. While the Government gives you a little leeway on your losses, they are not going to give you your money back. It should be no different for housing. (The Government already does not tax interest paid on a mortgage.)


Anonymous said...

Thanks for sharing this blog. Well, I guess if I were the homeowner, I wouldn't buy a house that I can't afford to buy. It's simply useless. I'll share an article "Home Loan after Bankruptcy – Is it Possible?", that's somewhat related to your blog. Feel free to check it out and have the chance to read it. Anyway, great post.

Anonymous said...

Our country AMERICAN, not congess!
had in the past bail out American
banks and other industries that invested in MEXICO when the money was worth nothing. Our government
gave the mexicans the money needed
to save thier economy.Also we GIVE
So why not for us.

Anonymous said...

So what do you think about the announcement this week by the Federal Reserve that they are bailing out about 20 troubled investment firms to the tune of about $200 Billion? It is just another example of the Republican government bailing out business and not troubled taxpayers.