The change in government rules does allocate winners and losers. With the restacked deck, Mr Underwater Homeowner is a winner, clifp's mom is a loser (nothing personal, clifp!).
The new loans will be originated without the normal fees charged by the GSEs. These fees covered many of the ancillary costs of originating any loan. Well, guess who is going to wind up eating those costs--taxpayers.
Of course the mortgageholders like it--it's money in their pocket. They are in an unfortunate situation. I was in an unfortunate situation when my equities took a dive in 2008--where was the government program to help stockholders who were underwater in 2008? Why would anyone even consider such a program? We know that investing (in a home, stocks, bonds, etc) has risks, that mortgage rates can go up and down, and that we can lose money. Same thing.
You and I are in complete in sync. To be clear it isn't just my mom, if you own the Vanguard Total Bond market roughly 1/3 is in mortgage back securities who's yield will drop and price already has, PIMCO has 38% of its assets in MBS (almost all of these are government backed).
Fundamentally I am still trying to understand why people who's value of their homes has dropped should get some type of special compensation.
Their gain is our loss. One of the long term consequence of changing the rules mid stream is that it make these type of investment less attractive in the future. I've been shifting out of GNMA both for myself and my mom the last year or so, this is only going accelerate my move, and if lots of investor start to feel the same way this will drive up long term mortgage rates for everyone.
I think it is important to distinguish this situation from the fairly common problem where a person, bought a house and then suffered a huge financial setback due to medical problem or job loss. I have sympathy for these
people and can understand programs that try to keep them in their houses.
It has obviously be a horrible few years for the economy. Some what lost in all the bad news about unemployment is the flip side of 9% unemployment rate is that it means 91% of the population is working. Now I realize that unemployment statistic understates the problem. However, I believe somewhere in the neighborhood of 75% of Americans are basically earning what they were before the crisis. Now I am sure the pay raises have been near zero, some benefits have been cut, inflation has continue to decrease their purchasing power, but basically they have same income now as this few years ago. (Of course the value of their assets has almost certainly dropped so the feel poorer, more uncertain).
For the most part this program is designed to benefit those 75%, so my fundamental to questions Micheal and other is what is so special about this group of people that us savers should sacrifice income for their benefit? Our incomes have take a big hit, theres may or may not have.
I think one of the thing that aggravates the housing problem is when politician and pundit talk about the situation they talk about how people lost hundreds of thousands of dollars on their houses. First of all most people only put down 10-20% even if they walked away they rarely lost more than $100,000. Second and more importantly just like an under water stock it is a not loss until you sell the same thing is true for houses. I was careful in 2008, to use the word paper losses, when I said I joined the million dollar stock loss club. If you are 20% underwater today in 5-10 years there is decent chance you can do a traditional 80% refi. Just like stock prices have come back from the 2008 lows.
The other thing which politicians forget is that their are two component to owning property, one is the value of the investment and the other is the value as place to live. Certainly the person who bought my Vegas condo in 2005 for just under $195K and saw it value drop to 50K made a horrible investment. (Although the bank took most of the loss). But the drop in the price houses has little (except in the case of mass foreclosure) impact on the value of them as place to live.
For instance, when I look at my condo, I wonder what if the person instead of walking away had stayed and made the payments. I calculate that if 2005 owner had put 20% on the condo, with 6% loan their house payments include condo fees, taxes and insurance would $1200/month today, if they only put 5% down the payments would be around $1,400/month with 6.5% loan. Now the place is nothing too special 2 bdr, 2 bath 1150', but it is certainly respectable working class housing. (Much nicer than some places I've lived) At 1200-1400/month much nicer than places in Hawaii, California, and much of the east coast for the same price. More importantly somebody making an average income of $45-50,000 can afford to spend $1200-1,400/month on housing. In fact, I suspect that if we pasted a law, banning any discussion of housing prices, the 2005 owner would happily living in the property not feeling any poorer.
Obviously the renter renting the same place today at $700 (my current lower asking price
) is getting an even better deal as far as value for a place to live. Of course in 24 years the 2005 buyer will own the property free and clear and the renter will still be paying rent. So who knows will be the ultimate winner.
Price is what you pay, value is what you get. The price of stocks, and houses can change very rapidly. The value of both changes much more slowly. I think it is instructive the government has made only modest attempts to drive up stock prices and yet in 3 years, the market has gone from being very undervalued to more or less fairly valued. The government's attempts to hurry the process in the real estate market have been pretty much abject failures, they should just get out of the way and let the market work.
