Saturday, September 20, 2008

Stop The Subprime Bailout

Even CNN has noticed that many taxpayers are far from excited about a government bailout of individual borrowers and institutional lenders involved in the subprime mortgage crisis.

As a responsible homeowner with a non-exotic mortgage, one which is no small burden to maintain given the high prices here in the Bay Area, I do not feel it is right to be asked to shoulder the burden of paying for other peoples' financial mistakes through my tax dollars. Why should the government reward financial irresponsibility on the part of borrowers, and unethical lending practices on the part of lenders (and repackagers)? A bailout encourages these sorts of lenders to keep on making these loans, which are irresponsible at best and criminally predatory at worst, under the assumption that we taxpayers are on the hook.

The housing market has begun a process of correction, and in addition to needing to pay my own mortgage, the loss of value of my home and real wages makes me even less able to pay more taxes to try to redress others' negligent and/or criminal behavior. I'd rather see my tax dollars go towards fundamentally more important things, like health care and education.

Or, if Congress wants to bail people out, don't bail out speculators, charlatans, and the irresponsible. Instead, bail-out young home buyers like me who were pinched by speculation-driven high property values, but who still worked hard, planned right, and spent time researching an "as affordable as possible in our area" home in order to buy under sensible, fixed-rate terms.

Despite my own resultant financial losses from this financial crisis, I do realize that a correction is necessary in order to keep housing values stable in the long-term. Let the market correct so we as a country can achieve stability and begin the process of rebuilding a housing market with sensible practices and realistic, not speculative, pricing.

If you feel the same way, in addition to checking out the folks, this page can help you write your congresspersons and tell them.


charlesbrownell said...

I don't like the bailout any more than you do, but it will hopefully stabilize the housing market which will be good for the economy.

So if we have to do a bailout what's the best way to do it. Probably not the plan we have right now.

How about this one?

Have a government sponsored loan available for every homeowner up to $100,000 - provided the outstanding mortgage is more than $100,000. The loan would be available at 0% interest plus the rate of inflation.

The catch is that the loan would be personally guaranteed and would survive foreclosure and bankruptcy.

As part of this deal the lending institution would agree to reset the balance of the loan to the prime rate.

The $100,000 would go to the bank to pay off part of the mortgage.

How much would this cost? Well we have 70 million homeowners and 50 million with a mortgage. Since this isn't limited to subprime it may be that all 50 million would take advantage of this offer. However, those who have a lower interest than current prime probably wouldn't take advantage. Also those who have nearly paid off their mortage probably wouldn't take advantage.

Let's say 50% of of the 50 million homeowners take the government up on the deal. That would cost $2.5 trillion.

Three thoughts on that $2.5 trillion.

First it would immediately solve the liquidity crisis because it would flow back into the banking system immediately.

Second, since the $2.5 trillion would be a loan it would eventually be repaid.

Third, the original value of the mortgage wouldn't change. This is an important point. Only those people who truly want to keep their homes would take advantage of this plan.

There's no uncertainty of how to value the bad loans.

There's no buying distressed loans.

There's no threat of the bailout causing housing prices to spiral downward like the existing plan.

What's wrong with buying the distressed assets?

You can't reasonably value them. If you pay too much the taxpayer doesn't get their money back. If you pay too little you cause downward pressure on
housing prices.

Can't take the $2.5 trillion price tag? Ok, then limit it to borrowers with a 620 credit score or less, or those with ARMs, or those with a subprime loan or those with an interest only loan. You get the idea. There are many ways to limit the price tag.