The Mortgage Bailout Plan Stinks!

December 4, 2007

This was in yesterday’s WSJ (emphasis mine):

The subprime sales pitch sometimes was fueled with faxes and emails from lenders to brokers touting easier qualification for borrowers and attractive payouts for mortgage brokers who brought in business. One of the biggest weapons: a compensation structure that rewarded brokers for persuading borrowers to take a loan with an interest rate higher than the borrower might have qualified for.

Source: Wall Street Journal – Subprime Debacle Traps Even Very Credit-Worthy ($)

That last sentence is the KEY to this whole mess! That’s the reason why things are the way they are.

I know I’ve been writing about the subprime mess a lot lately. That’s because every morning there’s a fresh article in the Wall Street Journal about the mess and what’s being done or should be done to fix it. Unless the government is going to track down every thieving mortgage broker and make them cough up all the money they “earned” by putting people in crappy products, I’m not on board with this mortgage bailout plan! Since we all know that’s not going to be done, I think that NOTHING should be done to fix it! N-O-T-H-I-N-G! To try to intervene in this situation is anti-American! It goes against our free-market principles and will only reinforce our dependence on “mommy and daddy” to come bail us out when we’ve made a bad decision.

Sure, I feel sorry for these people. I really do. However, there are consequences for our decisions. Good decisions usually equal good consequences while bad decisions usually equal bad consequences (unless the government comes along and bails you out).

I say we let market forces work out this situation. If lots of people lose their homes, there will be lots of cheap housing available to those who actually saved up money to buy a home. Credit standards will tighten and things will eventually go back to a more “normal” normal. Unless those who are foreclosed upon are jobless, they at least have an income. They can rent an apartment somewhere until they get back on their feet.

That said, I don’t think we can expect a rational approach to this situation. Why? Election-year politics!

30 responses to The Mortgage Bailout Plan Stinks!

  1. I agree. And yes, I know that this problem affects everyone, it affects the economy, and it can put people in bad situations, but like you mentioned, by creating drastic measures to resolve the issue, you’re eliminating the whole idea of a free-market.

    The problem is that everyone wants the economy, the stock market, and real estate to ALWAYS go up. That just isn’t how it works, and everything in this country can’t always be constantly increase in value.

    Businesses have to go through cycles, the economy has to go through cycles, investments, real estate, etc. all need to go through cycles. These cycles are what keep supply and demand in-check, and it provides new opportunities for other businesses and investments.

    So, I’m with you JLP. Yes, it can be an unpleasant situation for everyone while things get worked out, but if we just throw money at the problem or absolve people from their mistakes, we’re just creating a false sense of reality that artificially inflates the real estate market and economy.

  2. It’s sad…people trust financial advisers, brokers, etc, to know more about the industry and use their powers for good. Instead, these people use their powers to get more commissions and mislead the buyers. If people aren’t very financially literate, it would be easy.

    I think people should become financially literate–but I don’t think it’s right to lie to someone who can’t do math and give them the wrong change.

  3. So the scummy mortgage brokers and their compensation structure was the key to getting us into this mess, but you’re not willing to help the homeowners at all unless the government tracks down all the scummy brokers and lenders? To me this seems kinda silly. Yes you should educate yourself before buying a house, but at the same time, most reasonable people do expect their real estate agents and mortgage broker to be well, experts and somewhat looking out for them. Same reason people use financial advisors, CPAs, and lawyers – they cannot be experts in all fields.

    If you’re really convinced finding the brokers is the way to go, that should actually be fairly easy – you know the lender (Citi, Countrywide, etc) – their name is on all of the mortgage documents. They know who they paid and how much. If the government was interested in going down that path, it should be fairly easy to get the lenders to give you a list of the brokers they paid and their commissions schedule. At a minimum you can go after the lenders.

  4. Mrs. Micah,

    Those “trusted” advisors will get what they deserve. I always try to remember Galatians 6:7:

    “Do not be deceived, God is not mocked; for whatever a man sows, that he will also reap.”

  5. “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” –http://www.brainyquote.com/quotes/quotes/j/jpaulgett129274.html

    Replace $100 with whatever amount of “sub prime” mortgage debt is out there, and the “bank’s” with “everyone’s.” You’re right: in a perfect world, people have to pay for what they choose to do. The world I live in, for one, is not perfect.

  6. I also read that article in the WSJ, and what really struck me is that many of the people who purchased homes w/subprime mortgages had credit scores good enough to qualify them for a good, low interest old fashioned mortgage loan! Yet they were steered into these risky loan structures by brokers who averaged a 1.86% return for their work, rather than a 1.48% return for giving a 30 yr fixed loan. What a crock!

    I agree, we should not be bailing this corrupt industry out. The market should correct itself, the overinflated home prices need to adjust downward, and those who truly cannot afford a home should not be purchasing one. Home ownership is not a God given right, it is a hard earned privilege.

    I am not heartless, I am actually quite liberal in my political beliefs. But these repeated bail outs we do (anyone remember S&Ls?) cause greater harm and allow these practices to continued without warrented consequence. These brokers and mortgage companies (HELLO COUNTRYWIDE) need to pay for the damage they’ve done!

  7. Deb, I liked your quote: “Home ownership is not a God given right, it is a hard earned privilege.”

    This is so true, but unfortunately people in this country think that simply because they live in America, they deserve to have part of the “dream” which often includes homeownership.

    Yes, the lending industry got away from the tried and true 30-year fixed with 20% down that worked for decades and wanted to open up homeownership to more people, but sadly, if someone couldn’t afford a 30-year fixed or come up with a down payment, they probably shouldn’t be in a house to begin with, or at least not the expensive house they were dreaming of getting into.

  8. Micah has it exactly. Our mortgage rate is higher than we probably deserved. But how are we supposed to know? We shopped around with several lenders and the original rate quotes never materialized with any of them. Some quoted absolutely outrageous rates. We went with the best one we could get, but it was still higher than a person with excellent credit should have had. As first home buyers, we did extensive research and shopping around, but we STILL got, in my opinion, raked over the coals. Fortunately we didn’t fall for any of the ‘alternative’ mortgages, which they ALL pushed at least once.

    There’s no way to find out what your rate should be by your credit score and/or income, etc…you only have a vague idea. Maybe its just me, but as someone not in the mortgage business, I could only figure out so much of it all.

    We really do depend on these professionals to provide us with the best information, and frankly “free markets” don’t work when they’re all pushing the same bad products!

    Of course, we’re not in danger of foreclosure, we’re just paying a little more for the same house due to the higher rate, yet the final dollar amount was still within our budget. I’m not saying these homeowners don’t shoulder blame, but I can really understand how they could have been duped very easily. Riding these people’s salaries on commissions is outrageous, especially RE agents. Your RE agent should make more if she saves you money, ie works for you, rather than getting you to spend more.

  9. I agree completely JLP. We should not be bailing people out, let the market forces do their job.

  10. I don’t like the bailout either. Usually, the economics of these have unintended consequences; or at best they just spread out the pain.

    On the other hand, we do live in the real world. We don’t want to see something like this http://www.theatlantic.com/doc/200507/fallows actually happen.

  11. I totally agree with you, JLP. Facing and coping with bad decisions we made is part of growing-up process no matter how painful it might be. We tend to blame others for mistakes, but often when we really think about it, we’ll remember that nobody ever forced us.

  12. jlp, on the bailout, agree. but here we disagree. “a compensation structure that rewarded brokers for persuading borrowers to take a loan with an interest rate higher than the borrower might have qualified for”. i put the blame 100% on the supposedly naive and dream struck and overwhelmed home buyers. sure the mortgage brokers are dishonest, pushy, and deliberately misleading (you don’t want me to mention annuities again, do you?) – like just about every salesperson in this country any of us might deal with daily. buyer freaking beware. buck up subprime buyers. you rolled the dice. lost. i don’t for one second believe you were duped. next.

  13. People need to take responsibility for their actions. Part of that is analyzing the motives of those we employ (brokers, realtors, etc.). The realtors and mortgage brokers only get paid if a home or loan is sold. They will say whatever it takes to get this done. Buying a home is the biggest financial transaction that most people ever make. If you don’t take the time to find out what you can afford and the going interest rate for someone with your credit score, then you deserve what you have coming to you. That may sound harsh, but it should not be the government’s job to protect people from ignorance. The government has enough problem dealing with its own ignorance.

  14. I completely agree with you! The government should definitely allow the market to work itself out. I feel bad for the people who are losing their homes, but this was bound to happen, the way people were taking out interest-only loans, etc. I would like to see them get their equity out – whatever their down payment was, plus whatever they’ve paid back in principal. So I guess I think the lenders, rather than the borrower, should take the hit on the difference between the mortgage and the value of the house, if it’s gone down in value. While I believe borrowers should educate themselves about what they’re getting into, I also believe the lenders took advantage of them by approving risky loans and allowing inflated appraisals to be relied upon. Of course, that doesn’t really address the immediate impact on the economy, but the bottom line is, there’s a price to be paid and it’s going to be paid no matter what. But the government shouldn’t be the one paying it.

  15. JLP said: “Unless the government is going to track down every thieving mortgage broker and make them cough up all the money they “earned” by putting people in crappy products, I’m not on board with this mortgage bailout plan!”

    The thing is, the mortgage brokers have ALREADY gotten away with it. After they get their commission they have no responsibility for the loan, so the bailout plan isn’t letting them get away with anything they haven’t already gotten away with.

  16. I somewhat agree. I think people should have been more aware of what they were getting into. If something is too good to be true, then it probably is. The sale pitch of having a low interest rate for a few years but your house will appreciate by so much it won’t matter, was too good to be true. People need to be responsible for their actions.

    On the other hand, the mortgage brokers were being greedy and wanted to make as much as they could. They are one of the main reasons this whole thing occurred and it should be on them to fix it. I would say that we just shouldn’t trust anyone, but that would be a depressing world to live in. However, the mortgage brokers were a big part of this.

    I think that people who got mortgages that were at a higher interest rate than they would have qualified for, should be given the rate they should have received (which may be a bit difficult to figure out). If they have missed payments or whatever, the new rate should be retroactive and the mortgage company should absorb the shortfall. If people bought more than they could afford and a new rate won’t help, they will lose their house. They shouldn’t be bailed out. If for some reason the mortgage companies need financial help to deal with the problem, the government can give them a loan, at a few percentage points higher than what they would normally get (say about 8% or so). As JLP said earlier, you reap what you sow.

  17. The bailout plan from what I have read will only be available for those who have made their payments on time and whose credit has increased since the origination of their loans. What is this really going to change? Anyone who recieved a loan at this time should be smart enough to refinance (assuming their house has gone up in value). This really doesn’t change anything except these lenders won’t be getting huge interest checks in the coming months. They’ll most likely make more money as forclosures will be more costly.

    I for one have a 2 year interest only (adjustable after that) loan on my property and a fixed 30 year for the 20% down. It was the only way to afford a house when I graduated college with a high 700 credit score but short employment history. I’m stoked about this plan because it will let me wait another year or two to refinance at an ever better interest rate or allow me to just paydown my higher rate loan during the rate freeze. I for one can afford the higher loan payment (because I rent out rooms) but since they don’t know that I will get to use the plan and save money refinancing. Why should I have to pay some loan officer 3k just to fill out some paper work? The whole mortgage and real estate industry is filled with these overcompensated, lazy high school grads that are taking advantage of people and this will keep them from getting a lot of people’s money in closing costs and points when they go to refi into a lower rate mortgage.

    My lender was completely shady, he literally “fudged” numbers on my applications to try to get a better rate and bank for my mortgage. I’m sure he made out fine but what do I care? I got my house, it has gone up 30k in a year and a half and he got his 3k for closing…

  18. To call it a bailout would imply that the government has put some money into the deal. I don’t believe that is the case. It seems more like the gov’t helped the mortgage industry come to a desicion that helps their consumers and helps to keep their (the companies) losses down (IE: less forclosures).

  19. I took out a 20 year fixed mortgage in 2005 around the time my first baby arrived. I have a pretty high paying technology job, but could not afford more than a 1000 square foot house for my family in the area we live in. I really saw this whole mess coming. We had friends in similar situations who wanted the 2000 square foot house. So some of them took it on ARMs and interest-only mortgages. We thought it financially imprudent at the time to get into these obviously shady mortages. The obvious question was what do we do in 4 years when the rates adjust? Doesn’t seem all that complicated to me…

    So I figured the whole mess would come crumbling down in a few years and I would use the savings I had to buy the house my family wanted at a steep discount over 2004/2005 prices.

    Boy did I forget the conniving politicians and their quest to once again reward the cheaters. Hear this: people who took out these shady mortgages are and were cheaters. They didn’t want to play by prudent financial rules that we all knew about at the time. Most of them I know were college educated professionals who willingly drank the mortgage-broker koolaid so that they could get the big house NOW.

    How about this? The litmus test for owning a home is that you have to understand the difference between ARM, Interest Only and Fixed Rate. If you don’t get it, then renting is for you. Homeownership is not a ‘right’. I swear, the government is providing so many ‘rights’ these days, I wonder if we have any privileges left…

    Now I’ll be stuck in this tiny house with my family while Bush and Clinton use government to artificially boost home prices with their petty pandering.

    Government should stay out of this mess. It’s a necessary economic correction. Just like the illegal immigration issue, they are choosing to reward the cheaters at the expense of the people who play by the rules

    It was the easy money from these mortgages that caused the housing ‘boom’. But that same boom made a decent home unaffordable to people like me. Some boom. Now government wants to reward the morons, again at my expense.

  20. Chris:

    If you didn’t have 20% down at the time then you could not afford the house.

    I am happy you own a home that has appreciated, but in ancient times (pre-2000), you needed 20% down to get a mortgage. It’s only because the mortgage industry decided to throw prudence to the wind that you have that house. Be grateful, but don’t expect the honest guys like me to subsidize it.

  21. Well Jason being able to “afford” the house really depends how you look at it. When I purchased the property I was making less and therefore moved in people who made enough but were scared of homeownership, fine with me I gladly took there rent and paid 2/3 the mortgage. Renting just wouldn’t work for me, I’ve never lived in an appt. and never will. I also have a lot of toys, electronics, a drumset, tools, etc. that make renting a normal place unappealing.

    Rent in a house in Portland for a house like mine (3bed/2bath/2car) is easily 1200-1300, which just so happens to equal my mortgage payment. So what did I do when i needed a place? I bought, nothing down, no ‘application fee’, deposit, cleaning fee, etc.

    I’m guessing you wouldn’t be whining and complaining had I rented the house, made the same payment, and made some landlord wealthy.

    I can afford it, 20% down has nothing to do with it, I took a risk, I bet the market would still go up, I’d make more money down the road, and I wouldn’t have unforseen expenses.

    Well I only bet on sure things. With a college degree I’ll never be unemployed and there’s always someone looking for a house to rent (people like you saving that 20%) if things went bad and I couldn’t afford to live there anymore). Plus taxes and interest is tax deductible, I’m actually paying less for a house than a rental.

    Oh yeah and I voted for Bush, looks like it’ll pay off in more ways than it already has…

  22. Sounds like you covered your bases by renting it and doing a fixed mortgage so you know what you’d pay down the road. It was a business decision that makes sense.

    As for the ARM crowd who threw caution to the wind and had no plan for what they would do when the rates reset, I have little sympathy. I’m hoping I can gamble on some of their foreclosures. Of course that will be less likely if Bush and Clinton keep them in their houses by force of government.

  23. Jason:

    Money down has nothing to do with being able to afford something, even a house. Pre-2000 there were plenty of ways to buy a home with no money down, you obviously weren’t resourceful enough to find one.

    I’ve never lived in appt, never will, and I decided after college to never rent again. Rent for a house the size of mine is a hundred dollars less than the mortgage payment and taxes and interest is deductible. I have too many toys, I play the drums, and I like working on houses so having my own place was the only option. I also don’t have a car payment, don’t have kids or a wife to suck money out of me, so the only thing that would stop me from making my payment every month would be an unforseen catastrophic financial emergency (like my Rock and Republic jeans getting stained). I went to college so my odds against being unemployable are about a billion to one. Worst case scenario, I’d just move out and rent it out for the mortgage payment, probably to a guy like you (working hard to save that 20%).

    Glad I voted for Bush, first he kicks A$$ in the middle east then kicks A$$ in our mortgage industry.

  24. Wasn’t it clever how we privatized the profits and socialized the losses?

    Milton Friedman must be turning over in his grave.

  25. Chris, I bought my own house in 2000 with 2.5% down on an FHA loan. I bought it as a foreclosure for 70% the appraised price so it made sense. We don’t disagree at all. You seem prudent.

    I am conservative but I lost faith in Bush when he proposed amnesty for illegals (he tried to say it wasn’t, but we all know it was) and now a bailout for stupid mortgagees. If he were a real conservative he would not allow this moral hazard on either front to continue by rewarding law breakers and reckless financial decisions.

  26. Sorry, Jay, I like your style, but I disagree. I would definitely call it a `bail out’, and I don’t believe the Govt needs to put money into the debacle for it to be just that. What else would you call giving a PASS to those who made it possible for these risky mortgages to be financed at break neck speeds? And what would you call enabling homeowners to stay in homes they couldn’t afford in the first place?

    I do agree with Chris (altho I admit I don’t particularly agree with his style) – 20% for a downpayment isn’t always indicative of being able to afford something. Although I do think it’s wise to come up with a downpayment and to avoid PMI.

    I can’t count how many HGTV shows I’ve seen that feature a young couple with car payments and toy payments and a pile of debt, they have no money for a down payment, and they’re house shopping. But a little starter house just won’t do….it’s not big enough, it’s not nice enough…or it’s just not enough! I shake my head as they jump up & down at closing, and I wonder `where are they now, in foreclosure?’. Hey HGTV, how about a `where are they now’ episode?!

    We (the average U.S. consumer) have been living on the *promise* of a pay check in this country for far too long. We’ve been living beyond our means & ignoring the warning signs. We refuse to educate ourselves financially, and credit cards allow us to blur the line between a need and a want. If trouble hits, no problem! We expect our Govt will come in and bail us out.

    And by WE, I mean the Royal WE. Personally, I have no debt outside of my mortgage, have a healthy retirement plan, always keep more than enough cash available for emergencies, and have just purchased my first real estate investment, a SF home. I choose to do without that big new t.v. and a shiny new car. I’d rather sleep well at night, thank you.

    It’s a choice, and collectively, our choices have been very foolish. It angers me to see our Government enable those who make these choices (but hey, what did our Govt do during the 9/11 attack? Urge us to go out and shop. Heck, Condoleeza went shoe shopping during Katrina). And it really angers me to see these brokers and mortgage companies walk away from a disaster they helped to create.

    This country continues to try to stave off the inevitable – a serious market correction. What we really need is a good tree shaking to let the nuts fall to the ground.

  27. Hi Deb – I really don’t see where we disagree. I think I agree with everything you just said.

    I never borrowed against my house since I bought it except for some improvements. I paid 80% market value at the time, then put a lot of work into it, and mostly cash out of pocket. My wife and I were working at the time and had not had a child, so we used our extra salary to make all the improvements to the foreclosed house and pay off our cars. We had a couple of windfalls and combined that with savings to create a very nice rainy day fund. We have debt on our house roughly equal to my annual salary (1:1 ratio) and that’s it. Two newer cars paid for. On top of that a very substantial rainy day fund. The retirement gets funded well too. There’s plenty of money for this because we don’t run up credit cards and borrow all our equity from the house like a lot of people we know.

    A lot of our friends did things differently. Before they had kids, they bought the nicest house they could afford on the dual income. Now where are they? Well for one thing, they’re both working and putting their kids in daycare. My wife is able to stay home and raise our children the way WE want. She’s in a smaller house than our friends, but at least she’s in it all day and not in the office like most people we know. I amazes me how so many people put their material wants and status of having nice cars and big houses before the needs of their children. But hey, that’s just me and what do I know? Most of these friends also have no rainy day fund because their credit cards and big mortgage suck them dry every month leaving nothing behind.

    Deb, you and I are probably considered old-fashioned. Who cares. I don’t lose sleep at night because I know that even if I lose my job tomorrow, I can live for a year on savings and even longer than that on ‘equity’. To me it’s about quality vs. quantity.

    But if these spendthrifts didn’t drive up real estate prices with their easy cheap mortgages, maybe we’d be in a nicer house. Bush and Clinton want to reward them. But as long as the system keeps home prices artificially high, we’ll have to stay put.

  28. Great post. I am new to your blog and I really like what I see. I look forward to your future work.

Trackbacks and Pingbacks:

  1. Mrs. Micah: Finance for a Freelance Life / On My Own–Roundup - December 5, 2007

    […] JLP at All Financial Matters has promised to stop talking about the subprime bailout, but before he promised he offered an excellent take on what I think led to the biggest subprime problems. […]

  2. Bush’s Subprime Bailout: What about the Problems that Got Us into this Mess to Begin With? at SmartHippo Blog - December 7, 2007

    […] The web is abuzz this week with reaction to President Bush’s plan to help homeowners with subprime mortgages who are at risk of foreclosure. Bush announced the plan yesterday, which is aimed at 1.2 million borrowers who are at risk of foreclosure when their “teaser” rate period ends and the rates are readjusted. These borrowers will be able to either refinance their mortgage, have it guaranteed by the Fair Housing Administration, or freeze their teaser rate for a five year period. […]