Subprime Mortgage Bailout

[armor99]

I have been reading a lot recently about the subprime mortgage bailout that is being proposed in Congress. I must say that this whole concept in making me frustrated.
In the US, in a democratic society, we all have the right to choose how we live our lives, and the decisions that we make. I believe that we are all responsible for the decisions that we make, even the bad ones. So why do I keep reading articles that are talking about "people that did not know any better", and about "predatory lenders". Both of those concepts make no sense to me at all.
Taking out a loan for a home is a serious undertaking, and should only be attempted by those who really know what they are getting into. If you do not feel like taking that kind of risk (and yes.... buying a home has an element of risk to it), you can certainly rent somewhere instead. Owning your own home is certainly not a "right" in the US. I think the quotation that comes to mind is, "Ignorance of the law is not an excuse to violate it". I think this also applies to taking out a loan for a home. If you take out more money for a home loan then you could hope to pay back, then you deserve the financial reprecussions of that bad decision, just like every other decision in your life. If I touch a hot oven, it is certainly not the oven's fault that I got burned.
As for the term of "predatory lenders". The only way a bank loan can be oppressive upon anyone, is if you were to sit down at the loan office, and the bank manager pulls out a gun, and forces you to sign it. You are always free to walk away from a deal if it is not to terms of your liking. The banking industries got hit just as hard on this deal as anyone else. And the govt should not be bailing them out either! In a free country such as ours is, for this problem to occur at all, took two parties. The bank to offer way too much (a bad financial risk on their part), and the individual agreeing to the loan (a bad financial risk on their part). There was certainly no force or coersion used by either party to make that deal. But such is the freedom of living in the US. we are FREE to make foolish choices as much as we want to.
I am curious what some other here on the forum think. I am sure some will agree with me, and some will not. But in either case it will be interesting to see how other people think about this one.

 

[brewer12345]

Ah, yes, a libertarian wannabe who believes that the system is fair and the playing field is level.

I don't think I can respond to this one and be polite. Anyone else?

 

[Eyerishgold]

armor- I agree wholeheartedly.

Ah, yes, a libertarian wannabe who believes that the system is fair and the playing field is level.

How isn't the playing field level? You make it sound as if there are one set of mortgage products for "priviledged" people and a whole other set of products for the "underpriviledged". The reality is, the same products are offered and available to all people. The only difference is that some people take the time to learn about what documents they're signing and what type of product they're getting into and some don't.

It's just like with fast food. If you make the choice to eat Mickey D's everyday and end up overweight, is it McD's fault for not babysitting you and telling you their food will make you fat or is it your fault for not understanding that their food will mak you fat?

 

[tightasadrum]

armor,

I certainly agree with the gist of your complaint, to wit: when people and loan providers enter into a bad business deal, they both deserve to fail when it goes bad. And a lot of what we're hearing is political posturing. However, it tends to get far more complicated in a hurry.

Most of the bad loans have not come from retail banking institutions, which are regulated by law, but from the virtual banking system, regulated by the jungle of greed and fear. Outside groups sell sub-prime loans bundled together to investors, which were rated as A or near A, looking for better returns. Nobody asks the questions the banks will ask, like, "Hey, do you have a job that will allow you to pay back this loan on time?" And it sounds like there were two major groups that got sucked into this thing: people who would have never qualified for a regular bank loan, and people who were betting on the market bubble going up long enough to turn a quick profit from price appreciation. Bad bet.

Should they be bailed out. Hell no. Will congress do it? Well maybe, depending on what votes it will generate. But I don't think so, at least not much. And here's the other piece.

The Federal Reserve has tried to pump in discount fundsat a higher rate, to help the credit crunch. So far it's not working too well, for a number of reasons. But Bernacke, I believe, doesn't care about all these people, homeowners, lenders, Wall Street et al. one twit. But he does care about two things, and in this order: inflation & recession. The only real lever he has to pull to really try to affect these is the funds rate, which until now he has held steady. If he lowers rates, inflation could be an issue. If he doesn't lower rates, recession may be a problem. So what will he do? The world watches with bated breath.

Where will you put your money? If he doesn't lower rates, you better not be long equities if you'll need the money any time soon. If he does lower, what will the greedy market want next? You feed the alligator, eventully the alligator will eat you.

Tight

 

[PBAT]

Start with the fact that we don't teach kids personal finance in school (primary, secondary, or college). Then some mortgage brokers were telling people not to worry about ARMs or interest only for a few years because your salary and home values always go up. "You can always sell your home for a huge profit, pay off the loan, and get a bigger house! Or refinance in a few years to fixed."

Yes, parents should be responsible for teaching their kids basic finances, but if they never learned how can they teach their kids?

I am for personal responsibility. I don't know the answer to this mortgage issue. I don't think we (govt) should just bail everyone out, but I do feel that people who didn't know better were convinced they were doing the smart thing. Many people think of banks/mortgage brokers as professionals there to work for them, not as the salespeople they really are.

I don't think we should just bail out the mortgage companies either, as they knew the products they were selling often weren't suited to the buyer.

 

[CuppaJoe]

We have the right to take risks which strikes me as the very premise of this forum.

Sales people are very talented at showing us what we want. Sure I have an acquaintance who bought a condo, got a couple of small inheritances, and found a real estate agent who showed her that yes, she could afford to buy a dream house in an ocean front area. I think she's OK even if she is over 70 and still w**king.

I rent in a very expensive area: twice I took out leases that were more than I wanted to pay. The idea was that my income would increase and it did both times so that the rent became, not cheap, but more affordable. That is freedom!

I don't know the answer to who should or should not help those home buyers but it sure looks like The Depression to me when houses are foreclosed and financial institutions are failing. Do we need FDR now?

Off-topic: I don't understand the constant referral to the expression, "the fundamentals are good." How could this be considering my previous paragraph?

 

[Texas Proud]

Armour....

I am 'in the boat' with what you say to a degree... I don't what to see people bailed out with our money...

But, you are living in a la la land if you do not think that there was not fraud going on or bait and switch...

 

[W2R]

Personally, I knew about the iffy mortgages with the low rates and complicated payback schemes that were available when I bought my house, and at that time I had had very little exposure to financial decisions or how people buy homes. These mortgages seemed extremely fishy even to me at that time. I avoided them and went with something more conventional with higher payments. I did that because I am a firm believer that there is no such thing as a free lunch and that if something bad can happen, it will.

It's too bad that some people got sucked into these mortgages. Naivete is a dangerous condition. It's too bad that they had to learn these lessons with such an expensive purchase as a home. But life is that way. We make mistakes, and we learn from them and move on.

I don't see how these poor decisions when financing a house should generally be assigned as the government's responsibility, though.

I suppose that if someone can be proven to be mentally incapable, there should be some recourse; they should never have been allowed to sign for any mortgage in that case.

 

[Gumby]

Ah, yes, a libertarian wannabe who believes that the system is fair and the playing field is level.

I don't think I can respond to this one and be polite. Anyone else?

I think I can remain polite, but since all my previous battles with the libertarians have come to naught I no longer have the energy.

 

[haha]

As for the term of "predatory lenders". The only way a bank loan can be oppressive upon anyone, is if you were to sit down at the loan office, and the bank manager pulls out a gun, and forces you to sign it. You are always free to walk away from a deal if it is not to terms of your liking.

This is theoretically true. But there has been a lot of fraud, and there are products deliberately designed to confuse people.

When I was younger I had a few fairly sleazy sales jobs. The only thing that ever broke one of these deals was if finance just could not see any way that the customer would be able to make enough payments to make him profitable before he crapped out. Customers were meat, there to be chewed up, digested, and then the gristle spit out.

Maybe at best 10% of people can stay ahead of a financially motivated hungry salesman who has some confusing product to push, and a nice tight one-sided contract to go with it.

It grossed me out and I quit, but it was easy money with very little risk of much going wrong for the sellers.

I should add- I still don't favor a bailout. The negatives are too large. But I really don't think that we add insult to injury by blaming people who are mostly victims. The regulation should be done before the fact, thus preventing pressure for bailouts.

Ha

 

[maddythebeagle]

I thought Bush already said that it wasnt a "bailout"...You people really dont have any reason not to trust that...

 

[Eyerishgold]

I think I can remain polite, but since all my previous battles with the libertarians have come to naught I no longer have the energy.

Maybe it's because we believe strongly in our positions and have well thought arguments to defend those beliefs.

 

[brewer12345]

Maybe at best 10% of people can stay ahead of a financially motivated hungry salesman who has some confusing product to push, and a nice tight one-sided contract to go with it.
Ha

I think that's about right. I can understand what I read in a mortgage note or an equity-indexed annuity contract, but I would guess that 75+% of target customers cannot. Sitting ducks for the motivated salesman.

 

[Gumby]

Maybe it's because we believe strongly in our positions and have well thought arguments to defend those beliefs.

Nice try, but I'm not so easily tempted.

 

[armor99]

Well.... I really do thank each of you that took the time to comment on this. It was interesting to see the thought process and how each has come to the position that they hold. Some I have agreed with more than others, but if everyone always agreed with you, you would never learn anything new.
I agree completely that if anyone can prove that a mortgage lender told a customer something that was untrue, they should have the right to sue for damages. However if all the terms were available to review, then in my opinion you got what you paid for. Thanks again for all of your thoughts... that is why the forum is here to begin with...

 

[tryan]

Not much different from the stock owners crying "foul" after the tech bubble burst.

Very little was done then ... very little will be done now.

But if Freddy/Fannie/Sally get sucked into it - then we'll see ACTION.

 

[Eyerishgold]

Nice try, but I'm not so easily tempted.

 

[MikeD]

Nice try, but I'm not so easily tempted.

Touche! Oh, wait.

 

[donheff]

Well, putting my liberal hat on I have to point out that this mess is a good argument for regulation. Armor would say let the buyer and the seller beware - the little guys who didn't know better should have and the big guys get to take their medicine now. The problem is the Fed and others are worried about the economy as a whole. If they let too many of the big guys fail everything goes to hell in a hand-basket. The Fed isn't intentionally out to help specific big guys at the cost of little guys - they would probably like to see a few big guys go down the toilet to put a some fear of the market in the rest. But overall they have to bail the situation out to prevent disaster and many of the predators figure that into the risk calculations.

The question for you laissez faire types is do all of these derivatives, NINJA loans, and other creative devices have a net positive that outweighs the negatives we see when the sh** hits the fan? Conversely, would you counsel that the Fed should sit back and risk economic collapse to let things settle out by themselves? I don't have an answer but the bastards piss me off and I would curtail them to a degree.

 

[ERD50]

Ah, yes, a libertarian wannabe who believes that the system is fair and the playing field is level.

I don't think I can respond to this one and be polite. Anyone else?

brewer, what does a 'fair and level' playing field have to do with it? What fantasy-land do you live in?

Every where we turn, we are faced with unfairness and un-levelness (if that's a word?). We each need to learn to recognize those situations and avoid them. There are sales people in all walks of life, trying to sell you something you may not need, may not be able to afford. Is it the government's job to eliminate all possible temptations from our lives? How could they even do that? Maybe I really WANT to treat myself to a rare bottle of scotch, or an old collectable. Do I have to take a test to make sure every purchase I make is a 'wise' one?

I'm out-of-my league at a pool hall or a poker table, so I don't bet (other than fun) money there. If I decide to play and bet big, and lose, I should look for a bail-out from the government? I don't think so.

Buying a house is a big deal. People should not go into it without learning a little first. I'm in favor of government regulation as far as spelling out the terms in easy-to-understand lingo (it may be a state thing, we have a one page 'truth-in-lending' statement in IL) and harsh penalties for any fraudulent statements/actions.

Just checking, but we are talking about the same government that will sell a lottery ticket to someone that needs that money for food, or should be investing it towards their retirement, right?

I don't think it is a libertarian, right or left thing. I think it is called freedom. Freedom really does not exist w/o responsibility. I think that place is called Never-Never-Land.

-ERD50

 

[haha]

I don't think it is a libertarian, right or left thing. I think it is called freedom. Freedom really does not exist w/o responsibility. I think that place is called Never-Never-Land.
-ERD50

Quite so, and there should be no bailout. But for reasons of equity and expediency, there should be much more effective before-the-bubble regulation of financial institutions. There was in the past, so it is not an un-American idea.

It also isn't my crackpot idea. Hyman Minsky, JK Galbreath and lots of other heavyweights believe this also.

What we have now is the worst of all worlds- privatization of rewards (think hedge funds, private equity, connected politicians) and socialization of costs-think of us poor taxpayers.

Ha

 

[farmerEd]

I don't think it is a libertarian, right or left thing. I think it is called freedom. Freedom really does not exist w/o responsibility. I think that place is called Never-Never-Land.

-ERD50

You do realize that 50% of the population has a below average IQ don't you? Do you really think that someone with an IQ of 95-100 when handed a stack of 50 pages of legal documents at a closing has the ability to read thru all of them and completely understand the implications of every bit of fine print? How hard would it be to slip something unfavorable buried in the fine print?

I guess that's how the right views freedoms in this country...the freedom to legally screw people out anything and everything by taking advantage of people that are sometimes easily confused or not fully understanding of what they are getting themselves into. I don't know how people like that can sleep at night or live with themselves.

It is the mantra of the Republican party these days..."I'm looking out for number one and screw everyone else." Funny how most of these wackos go to church on Sunday and believe themselves good Christians too....

 

[Lusitan]

You do realize that 50% of the population has a below average IQ don't you? Do you really think that someone with an IQ of 95-100 when handed a stack of 50 pages of legal documents at a closing has the ability to read thru all of them and completely understand the implications of every bit of fine print? How hard would it be to slip something unfavorable buried in the fine print?

Um, how about the below-average IQ folks get a lawyer like everyone else does when they close on a house; every book, including "Homebuying for Dummies" will tell you that.

No bail-outs.

 

[ERD50]

Do you really think that someone with an IQ of 95-100 when handed a stack of 50 pages of legal documents at a closing has the ability to read thru all of them and completely understand the implications of every bit of fine print?

I'll add to Lusitan's lucid reply. I'm not so good at succinctness, though.

This is why I mentioned regulation/standardization of the terms and harsh penalties. A standardized one-page document could spell out payments, the max the payment could rise over time, etc.

An example is the reporting of fees and performance by Mutual Funds. The SEC has cleaned this up pretty well, IMO. Fairly easy to compare, w/o having to read all 100 pages of the prospectus and getting caught by fine print.

In my world, ideally this would not involve the govt at all. A lending institution association would come up with their own set of guidelines, and members would sign up and meet those guides. They could then advertise adherence to those rules. Every journalist, author, and consumer advocate would be advising, 'look for the 'Good Lender Seal' when shopping for a loan'.

Fox watching the hen-house? Do some reading on the history of UL (URL originally), to see how this works. UL is NOT a govt organization, yet people and insurers look to it to help assure safe electrical appliances.

I guess that's how the right views freedoms in this country...the freedom to legally screw people out anything and everything by taking advantage of people that are sometimes easily confused or not fully understanding of what they are getting themselves into.

If anyone wants to turn this into left/right/libertarian thing I guess there is nothing I can do to stop them. I already addressed that no one should be given a free pass to 'screw' anyone. But let me ask you this:

How would the gov't 'protect' people from themselves? Do they need to be involved in every purchase decision I make? No thank you. Seriously, what is the practical ramification of this? Tell me how this would work.

IMO, and many others, a bail out is the wrong kind of govt intervention.

I don't know how people like that can sleep at night or live with themselves.

It is the mantra of the Republican party these days..."I'm looking out for number one and screw everyone else." Funny how most of these wackos go to church on Sunday and believe themselves good Christians too....

I'm sleeping just fine thank you. Maybe that is because I don't really consider myself to be what passes for a Republican or a Christian these days.

-ERD50

 

[armor99]

This has been a really interesting read so far. I never would have thought there would have been that many divergant opinions. But I am learning how others see the world and that is always a good thing. I think I would have to completely agree with ERD50.
The most important part of being a US citizen is our right to choose. If the govt starts curtailing my right to choose then I have in fact lost some of my freedom, and not gained more. Even if the mantra of the govt becomes, "We are taking away your right to choose, because WE feel we know better than you, or you might make a bad decision and wreck your life". Does my life not belong to me? Am I not allowed to make bad decisions? Some of the wealthiest people in this country got that way because they were willing to make some large risks to get there. Sure... some lost it all... but others became very wealthy by taking the risk.
I also have to question FarmerEd's premise about people getting "screwed over". If you want to make the claim that most folks are just not intelligent enough to make their own decisions in life, then why not commit them all to an institution and be done with it? I believe that most people are fully able to take control of their lives, and that even the man with the most basic knowledge and skills should know enough to ask questions when they do not understand something. I condsider myself fairly inteligent, but I still ask questions all the time and find no shame in it at all. The only way that anyone in america can get "screwed over" by anyone else, is if their was some form of fraud involved, or if they did not pay attention to what was happening. To my undertanding the Banking system got just as "screwed" as the people themselves.
Then again... there are those who believe that theft of $5 from a weathy man is not the same as theft from a poor person. Because the weathy person can "afford" it. New wealth is created in the US all the time where there was none before. For me to make $100 does not mean that I had to "steal" $1 from 100 people to do it.