One of the discouraging ideas I've seen floating around the left-wing blogosphere is that a bailout should be aimed at homeowners with toxic mortgages, rather than at investors who bought those toxic mortgages after being defrauded by financial institutions who claimed the toxic mortgages were actually prime good quality mortgages. I got just one thing to say about this: BULLSHIT.
In my opinion, blame is shared equally between the homeowners and the financial institutions that issued the toxic mortgages. Both assumed that housing prices could just keep going up long after housing prices rose beyond what was affordable for most Americans. Both were idiots. In my opinion, bailing out irresponsible home buyers is the *last* thing we should do. They knew they were lying about their income on these "liar loans". They knew going in that they wouldn't be able to afford the mortgage when it reset. But they took on the mortgage anyhow because they bet that housing prices would be high enough when the mortgage reset that they could sell the house and cash out or would be making enough money by then to re-finance to a conventional mortgage. They lost their bet. Oh boo hoo.
Until these people's houses are back on the market for their *real* price (not the bubble price), houses are going to remain unaffordable for people like me who were prudent and did not buy during the bubble. We have to let housing prices drop, and the only way to do that is by marking these assets down to their "real" price by putting them back out on the market after foreclosure for a price that sells them within 90 days. We also have to figure out a way to hit the folks who issued these toxic mortgages, I suggest that after the Feds buy up the fraudulent mortgage-backed securities that they go after the banks and financial institutions that issued these mortgages for the difference between what the banks said these securities were worth and what they're *really* worth and take over any bank that can't make up the difference and sell it off at auction to new owners. The only way to keep this shit from happening again is by making everybody get hurt who was responsible for the bubble -- *including* the idiot homeowners who had the bright idea of signing on the dotted line because "housing prices are only going to go up".
- Badtux the Vicious Penguin
Dude, your libertarian side is showing. 40% of the people living in San Diego can't afford it. Somehow I don't think that that is limited to San Diego.
ReplyDeleteRight. And that's going to continue to be true if you don't let housing prices fall back to where they would have been without the massive fraud. I'm in the SF Bay area. *I* can't afford to buy a home here, and I make a damn good salary. I could have gotten a "liar loan" during the boom and bought a house that I couldn't afford, but I'm a prudent person so I did not do so. *BUT* -- if prices come down because all these liar loans get foreclosed on and those houses come on the market, I -- and thousands of others -- will be able to afford to buy a home with a regular mortgage. But the liar loans, "interest only" loans, and so forth are going to have to get worked out of the system before that can happen, and we have only one way of doing that in our system -- foreclosure.
ReplyDeleteIn the meantime, we have to keep the economy from going into a deflationary spiral. If we're going to have to bail someone out in order to make that happen, my modest suggestion is to bail out the one group of people who did not defraud anybody -- the innocent investors (mostly pension funds and such) that bought mortgage-backed securities that were touted by the bond-rating agencies as being "secure" and backed by good mortgages, when actually they were backed by this toxic sludge (liar loans, teaser ARM's, and such). As for everybody else... fuck'em.
- Badtux the Vicious Penguin
When I said 40% can't afford to live here, I meant they can't afford to rent, forget buying. This city has a tourist economy. People who work in the service industry make minimum wage.
ReplyDeleteTeachers, cops, firefighters can't afford to get into a condo and this is after the drop. (scroll down for chart)
I do understand your point. I can't help but wonder if some of the outrageous inflation in the price of homes has to do with Prop 13.
Yeah, Prop 13 is a big part of it, because people who no longer need a big home can no longer afford to trade down because the taxes would be too much on the new home. But the toxic mortgages and the attitude "I can pay anything I want because prices are just going to go up in the future" also had a lot to do with it...
ReplyDeleteSpeaking as a person who has endured the horrible, unAmerican indignity of living within my means, I'm entirely on Badtux's side here. Why would we rob the responsible citizens to buy sh*t for the irresponsible citizens? Is there some universe where that makes the slightest bit of sense? Because in this universe, that's called putting out the f*ck*ng fire with f*ck*ng gasoline.
ReplyDeleteThere's plenty of affordable housing here in Texas. And lord knows we could use some good teachers and some California liberals. I say send us all the destitute teachers you've got.
I'm with the penguin here. When I bought my house, I made sure that it was in my price range and not what the bank said that I could afford. I foolishly took a fixed rate because I did not want to take on the extra risk of an ARM.
ReplyDeleteNow the crap hits the fan, I get stuck with my obligations while those who gamed the system have an advocate in Washington. Contrary what the democrats think, those people do not deserve to stay in those homes.
I can't speak to the situation in California. But I know a number of homeowners in Washington State who simply got in trouble cause they wanted a home. They actually hoped college for one, while one worked, would be over and two good jobs a new reality when the interest bounced up. Or, their mortgages were sold to hostile asshole banks who wanted to tear down the old house and build a new more saleable one; so they used some fairly nasty practices to raise the payment and force defaults. Yes, some homeowners are the greedy irresponsible pigs you describe, but sorry, not all of them. And yes, "innocent investors" ...good luck, because I don't know how you tell who is innocent there. I think there were as many culpable "get rich quick" mentalities there as in the housing market.
ReplyDeleteBadtux, I think we basically agree here, we just happen to be looking at different aspects of the problem. Yes, there has been a ridiculous amount of inflation fueled by greed. My parent's house went from 3 to 7 hundred thousand in about 10 years. That's ridiculous.
ReplyDeleteMe and the old man didn't buy anything either, and we are rare in that we have money saved and avoid debt like the plague. I may make my husbands life a bit difficult at times, but he knows damn well than I'm smarter than him.
Labrys, hope is not a plan. I had people approach me saying I should buy for five straight years. I told them no because I had worked the numbers and a) I couldn't afford the payments with a conventional loan, and b) I for damned sure was not going to get an unconventional loan because those were toxic trash.
ReplyDeleteWhat you are talking about is the "gotta have it now" attitude of far too many Americans. Rather than wait until they can buy it in a financially prudent manner, they're willing to take on bad debt in order to do something they don't need to do. For the past six years since I sold my house in Arizona (due to having to move) I've lived adequately enough by renting. When buying becomes financially the best option again (as it was when I bought my house in Arizona), I will buy a house. Not before. Gotta have it now is not a financial plan, it's financial disaster.
- Badtux the Financial Penguin
Of course hope is not a plan. But you act as if every lost home was bought on nothing more. I know of at least two cases when very predatory lending practices played into losses where people could afford their payments, until the bank changed the rules. One neighbor was making his payments till his mortgage was sold. The new bank announced that because it was a mobile, they considered the term of the loan too long. They upped his payment by $400 a month; he fell behind. First he lost his car, trying to make the house payment---and then the property. The bank rapidly sold the place for the increased land value and got all their money back. I still contend that lenders are to blame in a good percentage of the cases. And it is more than hope when a family buys a home, counting on a college degree to provide a job before the interest jumps. In places where rents in a small town start at $800 for two bedrooms, and the gas prices make the long drives to the jobs prohibitive; many people willingly take a risk. Not all of them are speculating on selling later.
ReplyDeleteI've been waiting to but, too.
ReplyDeleteI'm going through NACA for my loan.
If you're thinking of buying, I would suggest you give them consideration.
Here's the site where you go to sign up for the seminar.
Main site
They have a history section there, and I would rather they explain to you who they are than let me do it.
Labrys, in your first example the guy did so many things wrong that it's hard to count them all, from allowing someone to just arbitrarily change the terms of the mortgage under him (that's not allowed by law) to him not just short-selling rather than trying to hang on to the property. If the bank could make their money back from the property, he could have too.
ReplyDeleteAnd yes, hoping for a job when you graduate from college *is* just hope. That's all. Hope is not a plan. Hope is a gamble. And that's a gamble that's easy to lose.
PT - note that the program you mention has a $3000 fee if you work it out. On a $300,000 home, that's the equivalent of 1 point. On a $150,000 home, that's the equivalent of 2 points. FHA charges 1 point for their insurance fee, so for anything under $300,000 you're better off going through the FHA loan program. FHA mortgage limits were temporarily raised until the end of this year, and it's likely they'll get bumped again after that, so that's an option to consider too if you're having trouble getting a conventional loan.
I think you missed something there.
ReplyDeleteI could go with a VA loan, but to me, it looks like NACA is better.
(fwiw, the va loan is guaranteed similarly to a game of Russian roulette that where at least one bullet is guaranteed to be chambered)
It's the interest rate, but I'm not so sure how this fits in when adjusted for inflation.
Where's the $3000 fee?
I have here, on a purchase price of $200k, Earnest money (refunded at closing) $1000, Inspection fee $400, Re-inspection fee $50, Rehab specialist fee $600. Those are purchase funds.
Pre-paid funds are: Homeowners insurance $2880, Escrowed homeowners insurance $480, Escrowed RE taxes $649, Pre-paid interest $451.
The membership fee is $50/mo for the first 5yrs, then a reduced rate for 2 more yrs, and it replaces the expense of the insurance.
My previous motgage payment jumped from $650/mo to $850/mo after the insurance company dropped me for filing a claim, and I had to buy insurance through the mortgage company.
No more.
So I got the property for $200k at 5.5%, right? Here's how the rate buy-down works.
For 1% down, the interest rate is reduced by 1/4%, all the way down to zero.
Effectively, for $12k, the interest rate goes to 4%. $6000 is coming from me, the other part from the seller at closing. This increases the price to $206k.
The payment is $1380 at 5 1/2%.
With the increased price (due to seller financed points) the payment is $1232, but this is with $6000 out-of-pocket.
A difference of $148/mo.
But the dollars in yr 1 where the $6000 is paid are worth more than the dollars in yr 20.
So, is $6000 up front worth $148 over 30 years?