The Bailout: Wall Street Vs. Main Street
Long rant behind the cut!
I keep hearing political rhetoric about the need for the bailout to help main street, not just Wall street. Many of the sound bites seem to include comments about the greed of corporate executives and the need to hold them responsible for the current financial crisis while ensuring that the people going through foreclosures receive help so that they don't lose their homes.
I'm beginning to feel like this is such fear mongering and pandering to the public. The implication is that the problem was caused by these greedy executives (who everyone usually hates anyways) and that the innocent, average American is in danger of losing their home as a result and through no fault of their own. This couldn't be further from the truth.
The start of this crisis was the greed of the public. It may have been magnified by the poor business judgment of corporate CEOs but it wasn't due to their greed.
I haven't heard many stories of people being issued loans with terms which were different from the loan papers which the borrowers signed. There certainly haven't been enough cases of this to result in the current economic collapse. The usual case for a foreclosure is when a borrower took out a loan which they couldn't afford to pay back. Now, this may have been unwise for the bank, but it was just plain stupid on the part of the borrower. The face that someone is a consumer doesn't excuse them from the responsibility to make good decisions and to clearly understand what they can afford, what they are purchasing (borrowing), etc. How could someone actually spend hundreds of thousands of dollars without either understanding all of the small print that they are signing or hiring competent, independent counsel to advise them? That's just a poor decision on their part and they can't really blame anyone else for it.
The real problem came with the bank's willingness to issue too many "Stated Income" loans. These were loans where instead of the borrower needing to fully document their income via W2 statements, tax returns, etc., they could just sign a document stating what their income was and the bank took their word for it. In return for the bank being lax in their loan screening and trusting the borrower to tell the truth, the bank would charge a higher interest rate. If the borrower really could pay back the loan, there still wouldn't have been problems resulting in massive foreclosures.
Unfortunately, the public's greed was too much and resulted in them lying on loan applications in an effort to purchase properties which they couldn't afford. In August 2006, Steven Krystofiak, president of the Mortgage Brokers Association for Responsible Lending, in a statement at a Federal Reserve hearing on mortgage regulation, reported that his organization had compared a sample of 100 stated income mortgage applications to IRS records, and found almost 60% of the sampled loans had overstated their income by more than 50 percent. These number are typical for what a number of studies have shown. That's just a case of people wanting to purchase homes they couldn't afford. When the regular economic cycle swung down a bit, many people started defaulting on their loans.
The fault of the banks wasn’t so much that they gave out loans to bad credit risks, rather that they gave out too high a percentage of bad loans to good loans. When too many bad loans failed, the banks went down too.
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So, where am I going with all of this? We'll, I guess that I'd hate to see people who made poor and greedy decisions to take out loans that they couldn't afford get help from the government to get away with it. I've had a dream of buying a house for most of my life. I've spend quite a bit of time looking at property and loans over the past few years, but each time I looked into it, I was forced to conclude that I just couldn't responsibly afford to buy property in my area. I had one mortgage company who was willing to issue me a 1.2 million dollar loan, on stated income, with no money down. Just because they would have given me the money didn't mean that I could really afford to repay it. So, I continue to rent.
Now, I'd really hate to have my tax dollars spent to help my hypothetical neighbor keep a house they purchased but couldn't afford and so are going into foreclosure on when I made the responsible decision to not buy a house. Additionally, that hypothetical neighbor is already getting a big government credit in the form of a tax break on their mortgage interest, which I don't get due to my being a renter. So, I already pay at least a few thousand dollars a year more than them in taxes and now I need to contribute more to them so that they can keep their house when I don't have one? I just can't say that I'm too happy with that.
What's a fair solution? I don't know, but I've heard a lot of proposals to limit CEO pay in companies who get federal bailout money. How about a proposal which says that anyone who walks away from a home due to a foreclosure is still liable for the difference in value between what they owe on the loan and what the property is eventually sold for? They would have gotten the benefit of any price increase, how about they take the full responsibility for the decrease with the declining market?
We'll see what happens, but I'd guess that everyone will really get off mostly free, and the real innocents are the responsible people who haven't been able to purchase a home yet but would like to get one in the near future. They just aren't going to be able to get good loans easily. They are the real injured parties.
I keep hearing political rhetoric about the need for the bailout to help main street, not just Wall street. Many of the sound bites seem to include comments about the greed of corporate executives and the need to hold them responsible for the current financial crisis while ensuring that the people going through foreclosures receive help so that they don't lose their homes.
I'm beginning to feel like this is such fear mongering and pandering to the public. The implication is that the problem was caused by these greedy executives (who everyone usually hates anyways) and that the innocent, average American is in danger of losing their home as a result and through no fault of their own. This couldn't be further from the truth.
The start of this crisis was the greed of the public. It may have been magnified by the poor business judgment of corporate CEOs but it wasn't due to their greed.
I haven't heard many stories of people being issued loans with terms which were different from the loan papers which the borrowers signed. There certainly haven't been enough cases of this to result in the current economic collapse. The usual case for a foreclosure is when a borrower took out a loan which they couldn't afford to pay back. Now, this may have been unwise for the bank, but it was just plain stupid on the part of the borrower. The face that someone is a consumer doesn't excuse them from the responsibility to make good decisions and to clearly understand what they can afford, what they are purchasing (borrowing), etc. How could someone actually spend hundreds of thousands of dollars without either understanding all of the small print that they are signing or hiring competent, independent counsel to advise them? That's just a poor decision on their part and they can't really blame anyone else for it.
The real problem came with the bank's willingness to issue too many "Stated Income" loans. These were loans where instead of the borrower needing to fully document their income via W2 statements, tax returns, etc., they could just sign a document stating what their income was and the bank took their word for it. In return for the bank being lax in their loan screening and trusting the borrower to tell the truth, the bank would charge a higher interest rate. If the borrower really could pay back the loan, there still wouldn't have been problems resulting in massive foreclosures.
Unfortunately, the public's greed was too much and resulted in them lying on loan applications in an effort to purchase properties which they couldn't afford. In August 2006, Steven Krystofiak, president of the Mortgage Brokers Association for Responsible Lending, in a statement at a Federal Reserve hearing on mortgage regulation, reported that his organization had compared a sample of 100 stated income mortgage applications to IRS records, and found almost 60% of the sampled loans had overstated their income by more than 50 percent. These number are typical for what a number of studies have shown. That's just a case of people wanting to purchase homes they couldn't afford. When the regular economic cycle swung down a bit, many people started defaulting on their loans.
The fault of the banks wasn’t so much that they gave out loans to bad credit risks, rather that they gave out too high a percentage of bad loans to good loans. When too many bad loans failed, the banks went down too.
-----
So, where am I going with all of this? We'll, I guess that I'd hate to see people who made poor and greedy decisions to take out loans that they couldn't afford get help from the government to get away with it. I've had a dream of buying a house for most of my life. I've spend quite a bit of time looking at property and loans over the past few years, but each time I looked into it, I was forced to conclude that I just couldn't responsibly afford to buy property in my area. I had one mortgage company who was willing to issue me a 1.2 million dollar loan, on stated income, with no money down. Just because they would have given me the money didn't mean that I could really afford to repay it. So, I continue to rent.
Now, I'd really hate to have my tax dollars spent to help my hypothetical neighbor keep a house they purchased but couldn't afford and so are going into foreclosure on when I made the responsible decision to not buy a house. Additionally, that hypothetical neighbor is already getting a big government credit in the form of a tax break on their mortgage interest, which I don't get due to my being a renter. So, I already pay at least a few thousand dollars a year more than them in taxes and now I need to contribute more to them so that they can keep their house when I don't have one? I just can't say that I'm too happy with that.
What's a fair solution? I don't know, but I've heard a lot of proposals to limit CEO pay in companies who get federal bailout money. How about a proposal which says that anyone who walks away from a home due to a foreclosure is still liable for the difference in value between what they owe on the loan and what the property is eventually sold for? They would have gotten the benefit of any price increase, how about they take the full responsibility for the decrease with the declining market?
We'll see what happens, but I'd guess that everyone will really get off mostly free, and the real innocents are the responsible people who haven't been able to purchase a home yet but would like to get one in the near future. They just aren't going to be able to get good loans easily. They are the real injured parties.