Mark Steyn gives his take on the Presidential ‘arrangement’.
The government has, in effect, nullified the terms of legal contracts mutually agreed by both parties – borrower and lender, Mr. and Mrs. Joe Schmoe and the First National Bank of Pleasantville.
This is a pretty remarkable act by a “conservative” administration. The government’s general absolution for imprudence by both borrower and lender doesn’t seem a smart move – for the U.S. credit markets, for real estate, for responsible borrowers for future homeowners, or for state and municipal taxpayers whose governments are being encouraged by Washington to bail out home “owners” by issuing tax-free debt.
Democrats bemoan the lack of “affordable housing” while simultaneously demanding government rescue home “owners” with unsustainable mortgages. But saving the latter obstructs the former: the principal benefit of a property-bubble correction is, after all, much more “affordable housing.”
Which brings me to my question. If a borrower gambled on a subprime mortgage with the knowledge that in 5 years interest rates may be going up making the house less affordable, and now he/she is in default and the bank is going to take back the home, what happens?
The homeowner loses the home, along with all that money he/she put into it in mortgage payments. Similar to rent.
So now the homeowner goes back to renting and has a ding on his/her credit rating and the bank gets the house.
BUT, the bank doesn’t want the house and puts it up for sale. Since there are so many of these foreclosed houses the prices go down and then property values go down and now other people lose money, OR they use it as an opportunity to buy a couple of rental houses and make some money….or maybe a vacation home.
I’m just not real clear on the need for government intervention.
Here in particular.
And then there is the timing of all of this.
The arrangement is for people who signed on to arms from 2005-2007. From the Washington Post:
Do you know what the rate is going to be in April 2008 let alone 2010?? Why the bailout right now? If you’re getting foreclosed on now, chances are it’s because you signed up for the ARM in 2002. That was 5 years ago and now the interest rate is changing and your payment is higher.
We are in this predicament because homeowners were told not to worry about their ridiculously low interest rates because they could refinance later before the rates reset. Or they were delusional in thinking they could afford future rate increases if they couldn’t refinance.
Again…what exactly is the predicament really?
And finally, if the government really thinks they should come in and do something, why is it they think renegotiating contracts is the thing to do, vs handing out their own mortgage loans to people who “qualify”? (and no, I’m not saying taxpayers should be bailing out homeowners…just that if something had to be done, how did meddling in contracts get to be the answer vs offering new contracts? Weirdness… )
As Steyn suggests
One shouldn’t overstate the administration’s actions: in Zimbabwe, the government seizes your property; in the United States, the government seizes your property contract and then hands it back to you all fluffy and painless. But still it’s a very curious move.