I remember watching the 60 Minutes story about the foreclosure capital of the United States with my brother. At one point, they interviewed a family that, based on the income they represented, should have NEVER bought a home. But, if memory serves me correct, they obtained one of those mortgages with a low introductory interest rate that this family could carry (interest only, 40 year term etc.) and then after a year the interest rate shot up to over 10%. Obviously, this family could not carry this new high rate and they would end up defaulting on their mortgage. But what I found interesting, and what just floored my brother and I, was that the interview was cast in a light that this family were victims of the mortgage industry. They were duped by a legal contract in 8 point font all full of legalese.
But, if you are barely getting by paying the rent, wouldn’t your spidey senses go off and think perhaps this mortgage is too good to be true and, at some point, you have to pay the piper (or the bank)? Can someone be that willfully blind pursuing the American Dream that they didn’t think there would be a cost to it (and, as I have written before, remember that the constitution protects against unreasonable and unlawful seizure of property by the government not an entitlement to own property)?
Thus, I have really mixed feeling about the Fannie Mae and Freddie Mac bailout and various measures by Congress to ensure taxpayers get to keep homes which otherwise may have been foreclosed on.
From a perspective of individual responsibility, I don’t know why the government is using tax monies collected from 9 of 10 honest taxpayers to bail out the 10th who acted irresponsibly and bought something they shouldn’t of. It also gnaws me that we keep bailing out those who get in trouble; people will never learn if there are no consequences to their action. We all want to be special but we are increasingly telling our kids that you don’t have to work hard for it.
Practically speaking, the bailout has to happen because, if it doesn’t, a good chunk of the mortgage and lending industry will head to a stand-still and, as much as I hate writing this, no bailout would only increase foreclosures, put more inventory on the market and prolong the housing slump. As strange as this sounds, it is more platable for us, the taxpayer, to keep people in their home through bailouts than let normal market forces apply.
I torn on this one. Anyone care to share their thoughts?
September 9th, 2008 at 7:47 am
I TOTALY agree. My wife and I bought our first home (condo) a year and a half ago in the middle of the “mortgage mess”. While we did see and receive many offers for these teaser loan mortgages we ended up going with a 30 fixed interest rate and putting our own money as a down payment. It is a lot of work and we only got (property value) what we could afford, but we made sure it was a good place and it is in a GREAT location which will help in increasing value over time. Yes, this took some time, a lot of reading and research…however I can now sit in my chair in my living room, in the house I own, knowing that I will always be paying the same amount for my home. While yes, there are people out there that got talked into crazy mortgages by people using tricky sales tricks, there are a lot of people out there making the biggest purchase of their life without going down to their local library or searching the internet, doing even a little bit of research before signing at the bottom….STUPID!!!!!
September 9th, 2008 at 8:54 am
I believe keeping out market forces will only make the mess worse. If not now, when?
September 9th, 2008 at 11:56 am
While I am not a big fan of bailing out speculators, I think Mr Spock said it best when he said “The needs of the many outweigh the needs of the few, or the one”. Paulson is a smart man and I suspect that this move will start the unfreeze of the market and ultimately, the US taxpayer will not be on the hook for much if any of this and may even end up making money on the deal.
September 9th, 2008 at 1:25 pm
Similar to the bailout of LTCM in the late 90s. If the Fed had not intervened, LTCM would have brought down the whole economy. It leads to bad precedent, since it will be expected that the government will help when things get ugly. It’s a catch-22, since if the government does not intervene, things just get worse.
September 9th, 2008 at 2:14 pm
I gotta agree a bit with Geoff. This mess has been coming for a while, so by bailing people out you just drap out the mess over a longer period of time. The housing market needs to correct one way or another. Will it suck? Yes, but it needs to happen at some point.
September 9th, 2008 at 3:04 pm
This is a special case based purely on the incredible size of Fannie & Freddie. Trillions in mortgages can’t be easily doled out to other firms if these two folded. The bailout was necessary to prevent a complete collapse. Yah, it sucks for the people who can actually afford their homes, pay taxes, and weren’t stupid enough to fall for the subprime crap, but millions of homes being left vacant hurts those people in the long run too, because some of their neighbours are the ones vacating.
But generally speaking, I think that companies need to be allowed to fail. Bailouts only prolong the inevitable and do nothing to create a leaner, more efficient system.
September 9th, 2008 at 10:42 pm
What I found to be totally deplorable, was how Fannie and Freddie had kept so many shareholders in the dark by completely denying the severity of the situation and reassuring people that ‘all was well’ up until the boiling point to the announced massive bailout.
Just think about the prospective educated risk takers that bought shares thinking things have ‘ bottomed out’ only to realize that they’ve been mislead or arguably even lied to!
Crazy stuff if you ask me.
September 9th, 2008 at 11:32 pm
If there will be a mass of people having to vacate their homes, wouldn’t that mean house prices will drop – allowing those who are renting and saving *right now* to buy those homes? Sure that hurts the current home owners. Must houses keep their value, using the heavy taxing hand of the state?
Is a home a glorified guaranteed investment certificate?
Consider the dot-com crash. For those who bought Nortel stock with margin, did the state bail them out? No, we let the margin calls lead them to cover. Did we try to prop up the stock again to protect the people who actually owned and were long Nortel? No.
September 10th, 2008 at 12:45 am
…one other galling point. The executives of both companies made out like bandits and will get away with all of this since if there was a crime of business stupidity, 80% of business leaders would be in jail.
One wonders why a company how is supposed to deal with long-term holdings like mortgages was publicly traded which favors short-term returns. Did someone not figure out that eventually, this inconsistency between business model and structure would lead to this?
September 12th, 2008 at 5:14 am
Lots of people tend to make stupid choices with their money, for whatever reason. I think that leads me to view them less as victims. However, many people lack the education or language skills to discern between a legitimate mortgage (or insurance, or investment) product and a scam… perhaps they could use some protection?
Jerry
September 12th, 2008 at 5:04 pm
It’s not just Fannie and Freddie….include the banks, mortgage brokers, home builders, inspectors, insurers, and the media. They all hyped a product, (for their piece of the pie), and the market moved in that direction. With initiatives like 0% down, 105% cash on closing, 40-year mortgage with interest only for 10-years at 2% initial terms…it just wasn’t going to end. That is what free-market enterprise is all about. But, bailing out Bear-Sterns, Fannie & Freddie and probably Lehman Bros., (and ultimately the family home owner too), will just delay an even more catastrophic financial ending. That has yet to be determined.
Mike