Stop Paying the Mortgage and Get Bailed Out Too!
Joshua D.Pro Member
BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votesLets see how much thought is going to go into this housing / bank bailout . . . frankly, I'm starting to think that the move to make is to stop paying the mortgage so I can:
a) Get "bailed out"
b) Renegotiate my loan
c) get any or all of the other great perks that some people in politics will bestow on those people who walked from their home.
Why not, right?
What do you think? Isn't this bailout just rewarding bad behavior? Yes, some people got screwed by bad people, but lots of people made bad decisions. Why should they be rewarded and those of us who pay our bills not?
I am a real estate title examiner in KY and I don't think the consumer needs to be bailed out, but they do need help. I have done so many title searches for Countrywide that were forclosures that I began to think they were in the business to forclose on properties. Many of these people have owned their homes for 30 to 50 years. A lot of people were lied to when they got variable intrest rate loans. No sane person would take out a variable intrest rate loan to purchase a home they intend to live in unless interest rates are very high and will most likely go down, not up. I think the lenders should have to convert the variable interest rate loans to a fixed rate loan, at their expense, and the interest rate should be fixed at the original agreed upon rate on each mortgage. I feel like this would help stabilize the housing prices and help stop the foreclosures and bankruptcies so that when the goverment buys up all these mortgages at least the houses will still be valued at the amount of the mortgage. I am not a financial wiz and would like to know if anyone sees any problems with this idea.
I agree. An outright bailout of people and institutions reinforces bad patterns that emerge again down the road in a new set of clothes.
I'm not sure if nothing can be done now, but it seems like there must be some sort of middle road where financial solutions can be reached while still keeping the people on the hook that made poor decisions.
I honestly don't know what the answer is.
Attached is a link to a CNBC interview of Warren Buffett this morning. Click on the video in the link to get his thoughts.
http://www.cnbc.com/id/26867866
He talks about the dire situation effecting the credit markets last week and the consequences of doing nothing. I don't pay much attention when people on Wall Street start screaming the sky is falling, but Buffett is of a different sort and I believe him when he says this would effect everyone significantly. I was surprised by the gravity of some of his comments.
I agree with you whole-heartedly on the concept the executives that got rich making bad decisions should not get off easy.
Every action has an equal and opposite reaction. Unfortunately the reaction isn’t always obvious. This bailout will cause problems that can’t be foreseen now. How often has the government done something only to have it backfire?
That was actually the topic of my blog post this week http://www.biggerpockets.com/renewsblog/2008/09/22/that-fateful-day-%e2%80%93-november-12-1999/. The repeal of the Glass-Steagall act almost a decade ago may have been the seed that germinated into the current mess. What unintended consequences will follow a bailout?
I agree with you whole-heartedly on the concept the executives that got rich making bad decisions should not get off easy.
I don't think that Josh was specifically talking about executives. I sensed that he was speaking of setting a bad precedent for the good old regular American borrower.
Dave has it right. I'm talking about the future bailout of the average consumer.
Buffet is right about the credit market-as bad as the stock market seems right now, stocks are doing MUCH better than the credit market. Although, if the government doesn't do anything stupid and starts acting rationally (I know, I know) it could help the country out. There is so much fear in the credit market right now that the 3 mo Treasury Bill auction went for .05% this week! People are willing to lend the US government money for virtually no return as 0 return is better than a loss in investors eyes right now! Last week, T Bills were actually trading ABOVE par meaning that people were willing to take a guaranteed loss rather than risk a much bigger loss-or said another way-they were willing to pay to have the US Government take their money. Things are FUBAR right now.
I don't know what the final proposal will look like, but it looks like that the final provisions of the bill will have little in the way of direct reward for homeowners who borrowed more than they could afford. (Although it might end up with something.) I guess they will indirectly benefit by keeping the financial markets functioning and therefore still be able to get credit in the near term.
I'd be surprised to see if anything gets in there allowing judges to reduce principal balances on loans. However, it does look like a cap on executive compensation for firms participating in the plan has gained approval by Hank Paulson. We'll have to see how things get hammered out. It looks like late this week or early next week we should know something.
Bob - Good point on Treasury Bills last week. That was crazy to see people literally paying a small yield to be invested in T Bills.
Michael - This bill probably won't take into consideration the consumer in terms of bailouts, but Obama has proposed that something to that tune be done ASAP, and he's not alone. These guys need to think long and hard at the ramifications of such a bill.
I think it's preposterous and tampering with the free market.
I believe that one of the reasons we're in this mess is because the Fed forced rates to stay low for so long after they were due to increase, which led to the buying spree, inflated prices, and further blowing the bubble.
I am a real estate title examiner in KY and I don't think the consumer needs to be bailed out, but they do need help. I have done so many title searches for Countrywide that were forclosures that I began to think they were in the business to forclose on properties. Many of these people have owned their homes for 30 to 50 years. A lot of people were lied to when they got variable intrest rate loans. No sane person would take out a variable intrest rate loan to purchase a home they intend to live in unless interest rates are very high and will most likely go down, not up. I think the lenders should have to convert the variable interest rate loans to a fixed rate loan, at their expense, and the interest rate should be fixed at the original agreed upon rate on each mortgage. I feel like this would help stabilize the housing prices and help stop the foreclosures and bankruptcies so that when the goverment buys up all these mortgages at least the houses will still be valued at the amount of the mortgage. I am not a financial wiz and would like to know if anyone sees any problems with this idea.
Arrg! This just makes me want to scream! Someone buys a house they can't really afford. But, they can, based on some "teaser" rate, and, most likely, flat out lies about their income on their application. And you say you want to set their loan back to the teaser rate? B*llsh*t! They should have bought a house they could afford based on their actual income and the fixed rates THAT HAVE BEEN AVAILABLE EVERY MINUTE OF EVERY DAY FOR THE LAST 10 YEARS! People who bought a house they couldn't really afford, assuming that their income would rise and their house value would rise and they could refinance are gamblers. If prices really had continued to rise, they would have been screaming bloody murder about paying taxes on their gains.
(Deep breath)
Yes, I'm sure there are numerous cases where people were put into bad loans. That's fraud, and something should be done to help those people. Letting them stay in a house they cannot afford is not the answer, though. Let them off the hook for the deficiency judgment, and let them get on with the life they could afford.
I daresay most people in this position knew exactly what was happening when they took these loans. Anyone who owned their home for 30 or 50 years, and is getting foreclosed was either out and out conned or used their house like a piggy bank.
Sorry, Karen, I don't really mean to attack you on your first post in the forums. It just really, really galls me that people bought houses they can't afford, or took all their false bubble equity out, creating a house they couldn't afford, and now want to be bailed out. Meaning that I'll pay higher taxes and my grandma will see her income from her CD's reduced to pay for what, in many cases, was greed on the part of these borrowers. I bought a house I could and can afford. I refied in the midst of the boom but took the great fixed rate that was available then. Where's my handout?
Well said, Jon. I concur.
I agree with both Karen & Jon...is that possible? I agree with Jon that people made some stupid choices but I side with Karen that it seems to me the smart thing for Countrywide and other banks would have been to simply reset the interest rates, especially enlight of the bailout talks. O.k. maybe not reset all the way back to the teaser rate but how about to something market rate like 6%. I know that some banks have a policy not reducing to less than 7.5%. If people can't afford it they will end up foreclosing anyway but at least they can try a few payments at the new rate and try to hang on. There are many ways the banks could improve their own situations but I guess it's easiest to create a horrible mess and then wait for Uncle Sam to clean it up.
At the risk of sounding redundant and adding no value to the thread, I totally agree with Jon. I feel a bit of resentment for being responsible. Not buying into the bubble, doing a lot of research on the difference between an investor and a speculator, and choosing the be the former, and now some irresponsible people get a bailed out at my expense.
Ah well...These are times when I need to practice being grateful that I am able to pay increased taxes to help those irresponsible people out. I'm going practice being all zen on this one...anything that will help me relax when making embarrassingly low offers on properties.
I agree with both Karen & Jon...is that possible?
Shari,
I don't think so. It's a matter of math.
Karen,
I think the lenders should have to convert the variable interest rate loans to a fixed rate loan, at their expense, and the interest rate should be fixed at the original agreed upon rate on each mortgage.
It is my experience that an interest rate change will not make any difference. If you cannot afford a home at today's rates, then it was never meant to be. Our rates have been historically low for years (as Jon said).
The interest rate isn't the problem. The new loan balances are the problem. If you owned your home for 30-50 years, then you probably had some equity when you refinanced. So, for the person that was in their home for 30-50 years and refinanced, where did the money go? (obviously not to paying their mortgage).
Interest rate modifications are a phony product being pitched for politicians to be able to claim that they are "sticking up for the little guy".
In very few cases do they do any good. Anyone with a HP12-C can do the math.
If it really was a matter of modifying a loan that was a 4% fully amortized ARM, that reset to 8%, back to current market, about 6.5%, then, maybe it would work. In a case like that, the payment on a $300K loan would have originally been $1432, would have gone up to $2201, and the modification would have put it at $1896. If that $300 difference lets someone stay in their house, great!
Note, however, that five years ago rates WERE under 5%. So, a 4% teaser wouldn't have been a great deal. More likely, they had a 2% teaser and a pay option ARM. Payments at 2% should have been $1108. But, the option ARM let them only pay, say $800. And $800 is all they could really afford. But, the system was set up to get them into a house based on the $800 payment. A few years later, they still owe the entire $300,000, and they've maxed out their negative amortization. Now they owe $325K and the rate resets to 8%, fully amortized, no more options. Their payment jumps to $2384. But they can only afford $1200 because their income hasn't risen anywhere nearly as much as they expected (inflation's been very low, remember?) Even resetting the rate back to current market puts the payment at $2054. The rate would have to be reset back to 2% to make this affordable. That would be just a flat out gift from someone. What is it in this situation that entitles anyone to a gift? Let them off the hook for the deficiency (Bush did that some time back, w.r.t. taxes), and let them buy or rent for an amount they can actually afford.
They should be grateful they had such a nice house to live in for the time they had it. A house they could't afford, but still got to live in. But, I'm sure they won't see it this way, and many will trash the property (I look at a lot of REOs), stealing yet more from the others involved in this deal.
One more think. Karen says "at the original agreed upon rate". You know what? The rate they currently have IS the "originally agreed upon rate". People say "hey, I didn't realize this was an ARM". Its in the docs, folks! Getting lied to by a mortgage broker is one thing. Having docs forged did happen, too. That's fraud and should be prosecuted. Signing a bunch of docs without reading them is a quite different thing. Not reading the docs and then saying "hey, I didn't understand" just doesn't fly.
There are lots of people who have ARMS currently at 8.5-11%. (I have seen lots of these loans.)
Here is a true example--
I had a client with an ARM at 11% in August. His bank gave him an offer to modify it to 8% and add all the late payments and penalties into a new mortgage amount. Even though the offer was reducing his payment by $395/mo., he tried to negotiate back to his original interest rate of 6.125% which he didn't have a problem paying. (His hardship was medical bills.)
After 30 days of waiting for an answer, the bank said no. The bank foreclosed on the property last week. It may have been difficult for him to keep the property anyway but considering that it is currently worth about 65% of the original value, it makes sense to me for the bank to let him try to make keep it at 6.125%. In addition, he had a second loan (100% financing) held by the same bank. So the bank basically told the investors on the second loan tough luck.
I agree, the Option ARMS are a different matter and those loans were probably doomed to start. Personally, I have only had one client with an Option ARM problem; most of the loan mods that I deal with are standard ARMS.
I only wish we could profit as much from the expenditure of our taxes dollars as our government is poised to profit. From what I've read and heard, all of the mortgages needing to be bailed out are not bad. There's a possible 2 trillion dollars to be made off this deal. We as tax payers probably won't see a dime. And what about the concept of collateralization for these monies?
Mr. Krzysztof, are you being sarcastic or serious?
Well, I edited my original post because upon further reflection I knew you must be joking.
I would actually agree that its horrid that people end up in personal bankruptcy because of medical bills. I confess I don't know if the problem is with the insurance companies, legislators, or a broken medical system. But something is very wrong. Remember the old joke that asked what we would do if there was a medical procedure that extended anyone's life by 20 years but cost a million dollars? It really seems we're just about at that point.
But, to the question of someone who took 00% financing, with ARM terms, and was then in trouble when it actually adjusted. Why should a person in that position expect an adjustment? They loan is unfolding on exactly the terms they agreed to. 6.125% isn't much of a teaser, so it seems like he had bad credit to begin with. Loan rates in August were over 6.125%, though not as high as 8% with decent credit. What's so unreasonable about an adjustment to 8%?
The fact it's now only worth 65% of what it was when he bought is an issue. It sucks to be upside down on a loan. But it the risk you take. Lots of people though they were geniuses when they properties were worth 50-100% more than when they bought. But, not that prices have fallen, someone else needs to take the hit?
Seriously, I want the feds to make up the loss I took on the car I sold recently.
Jon, I think you are missing my point. I'm saying that I would RATHER encourage loan mods by the banks than the government take over the loan or take over the property in whatever this bailout "plan" turns out to be. I agree, the buyer made a bad decision in the first place but I would prefer the banks should clean up their own mess and they haven't really made a serious effort to fix it. If a bailout was totally rejected and both presidential candidates said they would veto any bailout, I think the banks would work harder on loan mods and a variety of other options.
I think the banks would rather get this cleared up sooner than later. Most loan mods are going to be fairly small, like the 11% down to 8% you mention. The banks are NOT going to make major principle reductions, nor are they going to adjust people to lower rates. So, they're going to look at a loan, and ask if the loan mod is going to actually change things enough to get the borrower stable. In most cases, the answer is no. So, the bank would rather foreclose now, and be done with the loan than to let the loan drag out for another year.
Frankly, I'd prefer that, too. Lets get this mess cleaned up sooner rather than later, and get back to a level of sanity. Prices ARE going to fall and fall dramatically in some places. The real estate market is NOT going to go back to being like it was from 2000 to 2006. Just like many hi tech companies will never again see the valuations they had in March 2000, nor with the market for these stocks ever return the frenzy of the late 90's.
Folks who bought houses or refied at the peak are going to have to suffer some pain. They're either going to have to continue to make payments on a loan that has no backing, or they're going to suffer at least some of the consequences of not making those payments. The pain cannot all fall to the banks.
Or, we have to find anyone who sold a house at a bubble price, or a dot com stock at their bubble price and get the money back.
Again, I'll say I'd rather see the feds buy equity in these companies than buy their crap bonds, CMOs, CDOs, SIVs, debt swaps, or whatever they call them. So, I agree with you in that the banks should be left to clean up their own mess. The fed should get a return on the investment they make that will allow them to do this. You can bet that all the sovereign wealth funds that are making investments in these companies are making a return. Why should other countries be able to invest their money and make a decent return, while our government, and in turn you and I, have to pay? D*MN but I want to see some financial executives doing perp walks.
On 9-25-08 I posted "I think the lenders should have to convert the variable interest rate loans to a fixed rate loan, at their expense..." and everyone blasted me. Today I get an E-mail titled "BiggerPockets Offers Alternative Bailout Plan by Quicken Loans’ Chairman." This is basically my idea with a few specifics filled in. I personally think the Quicken Loans idea will work and I intend to forward it to every Senator and Congressmen I can find and E-mail address for. I am interested to know if anyone read the article and your views about it. I would also like to thank Shari Posey for kind of agreeing with me.
Thanks