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More Thoughts on the Housing Mess

By JLP | April 11, 2008

I’m getting tired of hearing about the housing mess. I’m especially getting tired of headlines like these:

Housing bill doesn’t help those in most trouble

Maybe these bills don’t help those who need the help the most because they are “unhelpable” (I’m pretty sure that’s not a word). For the record, I’m against even helping homebuilders. They were doing fine and dandy when things were going well. Now that things are heading south, they’re crying for help. I realize that these homebuilders employ people and that if they cease to exist, the jobs will go too. That’s how the free market works.

Housing, like everything else, is based on supply and demand. If prices fall far enough, there will be increased demand for housing and supply will tighten. If the housing supply gets tight enough, entrepreneurs will start become builders and start building again. Artificially propping them up with taxpayer dollars isn’t the answer.

I don’t see any easy way around this mess. I’m concerned that all these steps we are taking is only going to make things worse by giving people the idea that they can do whatever the heck they want and the government will come along and bail them out.

Oh, and before I finish this post, I want to point you to an interesting quote from the article:

The bill also offers $150 billion for pre-foreclosure counseling and stronger loan disclosure requirements.

WOW! ONE HUNDRED AND FIFTY BILLION DOLLARS for counseling and disclosure requirements? I would like to see the justification for that number.

Topics: Housing Market, Mortgages | 16 Comments »


16 Responses to “More Thoughts on the Housing Mess”

  1. Ken Says:
    April 11th, 2008 at 12:59 pm

    You are exactly right. This problem is not going to be solved with government waste.

    I think part of the problem can be blamed on the media. With comments like “why doesn’t the Bush Administration do anything about this”. They learned from Katrina that if you don’t throw billions of dollars at a problem, the media will destroy you.

  2. Jon Says:
    April 11th, 2008 at 1:11 pm

    You are not the only one that feels this way. It’s an election year, so like it or not, we probably will see a bailout package. The only thing we can hope for is that it gets tied up in Congress for so long that either 1. the election is over or 2. the market reaches bottom.

  3. Ernesto@InsuranceYak.com Says:
    April 11th, 2008 at 1:18 pm

    I’m feeling you bro.

    I’m afraid the Fed. may have given the US economy a body blow by bailing out Bear Sterns without Congressional input or approval. Now the tone of the country is: If we bailed out Bear Sterns, shouldn’t we bail out the poor people on Main Street as well?

    Even Mr. Independent himself Lou Dobbs is taking a homeowner bailout stand, as if 2 million people got hoodwinked all at the same time by evil Wallstreet bankers.

    The Fed. spending more money than it has to ‘Save the Mortgages’ will only punish savers and more prudent homebuyers.

  4. Lily Says:
    April 11th, 2008 at 3:19 pm

    JLP – I’m going out of town so I wasn’t able to email you this, but check out this transcript of an interview with a family that no longer pays the mortgage on the house in which they still live (http://marketplace.publicradio.org/display/web/2008/04/04/ghost_town_usa/).

    The husband: “If they reduced our interest rate back to 4.25, we might be able to make the payments, but I don’t think we’re going to. We would do it if the equity was there, but in a case where we’re already so behind… Imagine that for five years, say, we’re gonna pay four grand a month and then we’re just gonna be back up at what we bought the house for. We feel like we’re throwing away money.”

    The husband: “We went through months of being skinflints, because we knew that we were going into the red, so we didn’t buy anything. All the sudden, we had a bank full of money and we’re living rent-free, but we know that’s not really our money.”

    The interviewer asked them how that feels. The wife: “Great! Like he said, we were so tight with money…”

    The husband: “It does feel great, because all the sudden, we feel like we have a little margin now where we can go out to dinner, get a babysitter…”

    The wife: “We already went through the guilt. This is really what we need to do, not what we wanted to do, but what we need to do.”

    This article made me livid! A mortgage is a debt obligation. An obligation. You can’t stop paying it just because you lose equity in your house. The mortgage agreement doesn’t say, “Your payment is contingent on your equity in the house; if the equity goes away, you don’t have to pay.”

    The fact that they have money in the bank and would rather go out to dinner than to make good on a promise they made to the bank just absolutely disgusts me.

    They’re not representative of every family that got caught in the housing mess, but they are an extreme example of people with no sense of responsibility. This is just such a sick way of thinking about what they’re due, what they deserve, et cetera. “The guilt” shouldn’t be over until they realize that paying their debt is what they need to do.

  5. Curt at PennyJobs.com Says:
    April 11th, 2008 at 4:22 pm

    The people that cannot affort a house … shouldn’t own one. Their are plenty of appartments and houses for rent. The government bailouts are absolutely robbing the savers through inflation and the dropping dollar. But, until the public gets mad about it, the politicials are probably going to continue to create new bailout packages all the way to election day.

  6. Foobarista Says:
    April 11th, 2008 at 8:17 pm

    But isn’t the right to own a McMansion if you lie on your loan application in the Bill of Rights someplace? Maybe it’s free speech, or perhaps that one about “not quartering soldiers”?

  7. Todd Says:
    April 11th, 2008 at 11:57 pm

    I concur. Bailing out bad credit risks is not the answer. When I was lending in a community bank, the rule was 20% down. It takes a lot for a bank to get upside down in an 80% loan to value mortgage ! Lending 100% was a bad idea that anyone could see from a mile away. Granted some credit risks will ALWAYS be good, but 0% equity doesn’t leave a lot of options for the rest of the less-than-perfect credit risks.

  8. Kirk Says:
    April 12th, 2008 at 9:07 am

    Has anyone heard of Japan? Helllloooo! We chastised Japan because when their stock and real estate market bubble collapsed the Japanese government failed to let anyone fail – lenders or borrowers. They reduced interest rates to zero and increased government spending to bail out various parties.

    Here they are 17 years later with real estate and stock prices substantially below the peak. Government intervention made things worse causing serious deflation of asset prices.

    What was that song from the 80s – “I think I’m Turning Japanese.” However, the message behind that song was drastically different than what I am implying. :)

  9. "Mo" Money Says:
    April 12th, 2008 at 9:39 am

    Good post! The foreclosure rate affects about 1% of homeowners. Many of them were trying to get into a house that they couldn’t afford. Like a previous post said let the law of supply and demand control the market. not the government.

  10. Joey Says:
    April 12th, 2008 at 12:21 pm

    I agree that a bailout of mortgage lenders and homeowners is probably a bad thing. A bailout just means that more money will be printed and the value of the dollar will continue to decline. I’m seriously starting to think that the conspiracy nuts may be right and that we are heading for an Amero currency. However, I don’t really think it is a govt conspiracy. More likely it is just willful ignorance and a complete lack of foresight.

  11. test Says:
    April 12th, 2008 at 4:46 pm

    test….

  12. Lord Says:
    April 13th, 2008 at 1:58 pm

    The builders incentives are a crass demand for political contributions and should be rejected. The industry overexpanded and needs to scale back and this just worsens the adjustment. As for education, it is the investors that really need it and are getting it, and that is a lot more than 150B.

  13. CHAD Says:
    April 13th, 2008 at 6:34 pm

    You don’t reward stupidity with a bailout.. yea, this mess is causing a major economic stumble right now, but any govt action will just make the recovery process take even longer and potentially lead to a more severe issue. if the market is allowed to “clean itself” this problem will pass quickly. But these “Geniuses” in Washington D.C. are going to have to pass all these feel good measures that will make the cure worse than the diesease. nuff said.

  14. Kitty Says:
    April 13th, 2008 at 9:53 pm

    I so agree. I’d understand if it actually were to help the economy as this whole mess hurts a lot of people who had nothing to do with mortgages – investors (like most of us), employees of all the companies that go bankropt, everyone who is hurt by bad economy. The trouble is that I don’t see how all these measures could help. First we have a tax rebate (ok, I don’t get anything, so I am not objective) and accompanied 54 million waste of sending letters. Here we have 150 billion for “counseling”. If I had decided to take a 20/80 interest-only mortgage and buy a Central Park West apartment because it is “my dream” to own a place there, would I’ve gotten a bailout too? So what if I cannot afford a broom closet there, everyone is entitled to get a place of their dreams, right? Besides, as real estate can only go up and up and up (and trees grow to the sky), I could just sell it in two years and made a killing.

    Now, how is 180 billion dollars for “counseling” will help the economy? I am not much of a gambler, but I’d bet my own $100 that if the government had kept the same programs, the same taxes, but just reduced waste such as this money for “counseling”, it would substantially reduce the deficit.

    Lily, this is my sentiments too. It seems a lot of debt problems – be it overspending with credit cards or buying a house one cannot afford comes from a failure to learn one simple rule: if you borrow money you have to pay it back. This isn’t even “financial education” the lack of which so many people lament, this is honesty and morality. Everything else follows from this rule: that borrowed money aren’t really yours and you shouldn’t borrow more than you can repay, or spend more than you can afford.

  15. Clarence Benjamin Says:
    April 14th, 2008 at 6:10 pm

    I believe the real cause of this mess is overly aggressive underwriting. I come from the old school of lending based on the 3 C’S. credit, capacity and collateral. The automation of underwriting which utilized the credit score as a main criteria, to me, is a joke. I have seen home loans approved and closed where the buyer just completed chapter 13 or even worse, was paid out of C-13 with a refinance loan because they had a qualifying score. The other big factor is that these loans were underitten based on Gross income to determine DTI. While a family with $5000 per month gross and no kids may be able to pay a $2000+ per month mortgage note, that same family with 4 kids will struggle. The average customer does not know this as they are mainly concerned with getting the home and the “sound” of the payment, never putting a pencil to it. Old school lenders evaluated all of these factors in reaching a decision.

  16. Funny about Money Says:
    April 15th, 2008 at 11:16 pm

    Garrhghhh!

    I just learned that the woman who bought my last house and defaulted on the mortgage walked away from a short sale with NO DEBT, zero point zero zero, free as a bird.

    When she bought the house, she had no job. She had not held a job for three or four years. A lender actually gave her a $206,000 loan with $5,000 down. This was before the bubble.

    Instantly she buys my house and I take the money to pay off the mortgage on my new shack, the bubble starts to expand. Before long, both houses are “worth” $150,000 more than either of us paid for them.

    Still unemployed, she now goes out and borrows ANOTHER $100,000 against the make-believe equity in the house. So now she owes $316,000 on a house she’d paid $211,000 for a few months before. Absent the bubble, the house’s real value would probably be around $225,000, at most.

    She makes no effort to get a job. We — her former friends and colleagues — watch as she passes up an opportunity for a position as a translator paying significantly more than she used to earn as a tenured university faculty member. It becomes clear she has no intention of working. Ever. She starts to draw down her 403c. Yesh. She’s LIVING ON HER 403c PLAN! And she is not 59 1/2 or anywhere near it. She junkets to Mexico; she junkets to Central America; she tours India; she hangs out with her relatives in the Caribbean. She moves in with friends in northern California, where the weather’s nicer than it is here. The house stands vacant.

    She finally gets a pseudo-job in an alternative school in the forests of northern California, where she’s teaching eight kids and living rent-free in a commune.

    The bank threatens to repossess the house, so she declares bankruptcy. She hires a smart lawyer.

    The upshot of it is that the house is sold at a fire-sale price — pushing down property values for everyone in the neighborhood — and she walks away scot-free.

    Sorry, but it’s hard for me to work up much sympathy. I can’t feel any for the buyer, who never had any intention of earning enough to make payments on a $316,000 debt. And all I can feel for lenders who would make any such loan to an unemployed deadbeat is rage and disdain.

    A pox on all their houses, residential and banking alike!

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