Who's Going to Pay for the Subprime Mortgage Debacle? Surely NOT the US TaxpayerSomervell County Salon-Glen Rose, Rainbow, Nemo, Glass....Texas


Who's Going to Pay for the Subprime Mortgage Debacle? Surely NOT the US Taxpayer

28 August 2007 at 4:25:18 PM

We were already stiffed for the Savings and Loan debacle in the '80's. I saw a letter to the editor in the Cleburne paper today that said that Senator Dodd has put in a bill to have the US taxpayer bail out the people who were stiffed on subprime mortgages. I figured that couldn't be correct, so I started doing some online checking.

First up, I read earlier today about Countrywide (which is headquartered up off Legacy Drive in Plano) and how they deliberately encouraged their mortgage sellers to sell subprime to borrowers EVEN IF THE BORROWER COULD AFFORD PRIME. Now, tell me that Countrywide and others of their ilk shouldn't be responsible for their own mess. Second, this doesn't only affect the poor people who were trying to get a house but also middle class who thought they saw a good deal, that the value of their property would always be coming up and there would never be a reckoning at their door for higher interest rates. Doesn't this sort of fall into either "There's a Sucker Born Every Minute" OR "Ain't It Terrible When Your Chickens Come home To Roost". Either way, does that make ME responsible for other's bad choices?

Seems that both Clinton and Edwards are proposing bailing these people out.. at our expense.

Senator Christopher Dodd of Connecticut, the chairman of the Banking Committee who is seeking the Democratic presidential nomination, has summoned the Treasury secretary, Henry Paulson Jr., and the chairman of the Federal Reserve to a meeting Tuesday to discuss steps to stabilize the markets and stave off home foreclosures.

Senator Hillary Clinton, the Democratic front-runner, recently proposed a $1 billion fund to help distressed families catch up on their mortgage payments. In an open letter to President George W. Bush, Clinton attacked the president for appearing to minimize the magnitude of problems facing homeowners.

John Edwards, the former senator from North Carolina, is proposing a similar bailout fund and has argued that federal regulators should force mortgage lenders to restructure the terms on many of their loans.

So, Should Government Ride to the Rescue?

Both the administration of President George W. Bush and Democratic leaders in Congress agree that legions of homeowners could be overwhelmed in the next 18 months, when low teaser rates expire on more than two million adjustable-rate mortgages, and monthly payments increase sharply.

More ominously, falling real estate prices and a pullback among mortgage lenders are expected to make it more difficult for overstretched home buyers to refinance their way out of trouble or simply sell their houses.

"This is really just the beginning," said Karen Weaver, director of securitization research at Deutsche Bank. "There's a big wave of defaults coming over the next 12 to 18 months."

Democrat solution

The proposals would expand the program of insuring home loans under the Federal Housing Administration, part of the Department of Housing and Urban Development; create a national fund for "affordable housing"; expand the ability of Fannie Mae and Freddie Mac, the government-sponsored finance companies, to buy renegotiated subprime mortgages; and give bankruptcy judges more power to order easier terms for borrowers.

Bush Solution.

The Bush administration, with the Treasury Department leading the efforts, is looking for more limited solutions. Administration officials are working on their own ideas to let the FHA insure slightly more expensive homes, which could make it easier for people with low incomes or weak credit to switch out of subprime mortgages and into more traditional fixed-rate loans.

Subprime Sob Story

"Subprime mortgages and the brokers who peddle them are helping to take families out of homes in which they've lived for years," the story whined in a story profiling a Detroit couple allegedly forced into a bad deal by an aggressive subprime lender.

But when you peel back the story, you find the couple is hardly a hardship case worthy of our sympathy. Turns out they live in a nice neighborhood in the burbs and drive a Lincoln Navigator.

And the loan they took out was a mortgage refinance. They used cash from the bigger loan to buy toys they couldn't afford -- including stainless-steel kitchen appliances and a koi pond.

The bank has foreclosed on their property, and now they're angry at the bank. It's never good when someone loses his home, but no one held a gun to this couple's head when they signed the loan papers at the title company.

Should Bush Bail Out the Homeowners at taxpayer expense in order to gain grateful Republican voters?

"The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue. Fiscal, not monetary policy should be the preferred remedy, one scaling Rooseveltian proportions emblematic of the RFC, or perhaps to be more current, the RTC in the early 1990s when the government absorbed the bad debts of the failing savings and loan industry...This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hardworking Americans whose recent hours have become ones of frantic desperation...And if you're a Republican office holder, you'd win a new constituency of voters—"almost homeless homeowners"—for generations to come. Get with it, Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Re-establish not the RFC or the RTC, but create an RMC—Reconstruction Mortgage Corporation...Write some checks, bail 'em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all, "W," you're "the Decider," aren't you?"

My take on this:

1) This would totally alienate conservatives, many of whom were pretty disgusted heading into the 2006 election with what they perceived as the free-spending ways of the White House and the GOP-led Congress. Here are three pretty typical responses to the Gross bailout idea posted on the conservative Free Republic message board: "Using whose money? Mine? In a pig's eye. I work for MY home, not yours." "Why is it that I, who [watch] what I spend, put 20% down on my home, got a conventional 30-year loan and make my payments on time get nothing while some want the government to bail out stupid people?" "I hope every home squatter that signed those mortgages gets put out on the street!"

2) Talk about playing on someone else's home turf. Any Bush bailout idea, if he should propose one, would inevitably start a bidding war with Democrats. Hillary Clinton, for instance, has already proposed a billion-dollar fund to boost state programs that help at-risk borrowers avoid foreclosure. I don't see why the Republicans would get more credit than the Dems.

 Hillary Clinton wants to use our tax money to bail out the subprime borrowers? Pfffttt.

3) We're not talking about a very big constituency here. Research firm First American CoreLogic projects 1.1 million subprime-related foreclosures, spread out over a total period of six to seven years. And it's blue state California—which Democrat John Kerry won by 11 points in 2004—where most of the trouble is, with a reported 39,013 foreclosure filings in July, the most of any state for the seventh month in a row and up 289 percent from July 2006, according to RealtyTrac.

4) Not that politicians necessarily care, but the economics of a bailout are pretty iffy. As U.S. Appeals Court Judge Richard Posner, a guy who specialized in the effect of economics on law, notes in the blog he shares with Nobel Prize-winning University of Chicago economist Gary Becker:

"The only justification for bailing out risk takers is to avoid a depression (or as it is politely called nowadays, a "recession," but, oddly, the worse the macroeconomic consequences of a speculative boom and bust, the stronger the argument for punishing the risk takers (which include both borrowers and lenders) by not bailing them out. ... If the government relieves risk takers of the consequences of their risks, there is a divergence between social and private risk. An example is subsidized flood insurance, which leads to excessive building in floodplains. ... Moreover, government intervention to help lenders and borrowers invites further government regulation—for example, limits on subprime lending. There is no more reason to discourage risk taking than to bail out the risk takers when the risks they have voluntarily assumed materialize."

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