Monday, April 14, 2008

Does Helping Your Neighbor Help Yourself, Too?

No time for an original post today, but here's a perspective about the bailout. I don't necessarily agree with all of it (like the complete innocence of buyers and the conspiracy by lenders)--I just thought you'd find it interesting (this link also has a question about gold):

As Congress moves ahead with efforts to fix the mortgage mess — and head off another million or more foreclosures — a lot of readers are wondering: why should homeowners who got in over their heads get help from the government?

My question is this. It seems to me that too many people in this country are getting a free pass with this mortgage mess. I, for one, got a 30-year fixed loan, paid the fees, pay my mortgage on time and so on. But all these people who took the easy way, low payments for two years, zero down etc., are basically getting bailed out in some form or another, whether it be mortgage companies rewriting their loans, or doing a short sale. Where is my free money for doing it the right way in the first place and paying my bills like I agreed to? — Dave B., Sultan, Wash.

It’s absolutely a fair question.

There’s no doubt that some of the people who are now losing properties to foreclosure entered the market at the height of the boom, put little or no money into the transaction, planned to make a quick buck, and then got burned when the music stopped. They made a bet and lost. The government shouldn’t be expected to help them any more than it should be helping out losers at the craps table in Las Vegas.

The problem is that the lending boom — and in its latter stages it was a lending bubble, not a real estate bubble — swept up a lot of people whose only mistake was trusting a mortgage broker or lender who promised to get them started on the path to homeownership and then wrote them a loan that they knew was unsustainable. Is it really plausible that a novice homeowner could somehow dupe a chain of financially sophisticated players that included mortgage brokers, lenders, Wall Street firms packaging these loans into securities and the investors who bought them?

Unlike those of us who may be on our second or third mortgages, or who learned the hard way that some “trusted professionals” are neither, many first-timers got suckered. I’ve heard from hundreds of readers and talked to dozens who fall into this category. The issue of “personal responsibility” seems irrelevant when the transaction was so complicated it flummoxed even the Wall Street investors who bought these loans and are now writing off hundreds of billions of dollars.

It turns out that, so far, very few mortgages have been rewritten with more favorable terms. True, there are short sales going on, in which the homeowner sells the house before foreclosure begins and the lender agrees to take less than the loan’s full value. But many of the appraisals on which those loans were based were fraudulently inflated — to benefit the lender and mortgage broker, not the buyer. In any case, I’m not sure how a short sale qualifies as a bailout: The homeowner loses everything.

It’s also worth considering the “bailout” that’s been extended to the lenders who made these bad loans in the first place. Even before the $30 billion taxpayer-backed rescue of Bear Stearns, the Fed had been flooding the banking system with cheap money to help lenders recover from the bad decisions they made. And in many cases, these loans were so highly "leveraged" — made with borrowed money — that the investment bankers churning them out had essentially no money down either.

At some point, you also have to consider the issue of protecting the value of your home. If another 1 million to 2 million homes are foreclosed in the next 12 months, it’s hard to see how the housing market will be able to recover. That means the value of all of our houses will continue to fall and the economy likely will slide along with them.

Think of it this way: If your house was in the path of a wildfire, would you object to the fire department putting out the fire on your neighbor’s house to protect yours?