Sunday, September 21, 2008

Banks, but not homeowners, to be rescued

U.S. Treasury Secretary Hank Paulson was just interviewed by George Stephanopoulos on ABC's "This Week." One of the most amazing, at least to me, things he said was in answer to Stephanopoulos' queries about foreclosure relief. He was asked what the American public would get in return for the billions of taxpayer dollars being given to the banks? Could individual Americans facing home foreclosure receive any relief as part of this package?

In reply the Treasury secretary said that the vast majority of Americans facing foreclosure were in that position because they had bought more house than they could afford. Although they paid more for the house than it is now worth that, according to the secretary, is not why they are facing foreclosure. Although they got a higher interest loan, a variable rate loan, a balloon loan that was not the best loan then available that, according to the secretary, has nothing to do with it. Nothing could possibly be done to keep them in their homes because, even if as part of this package they were refinanced at the current market value of their house with a 30 year mortgage at a fixed rate that is the best now available for them, they could not make those payments because they simply bought more house than they could afford. The housing bubble had nothing to do with it. The fact that loan agents were incentivized to steer borrowers to higher rate, variable rate, riskier loans had nothing to do with it.

Do you find that believable?


lyrl said...

I do find it believable. I find it equally believable that banks loaned their money to people they should have known would not be able to pay it back. There was a societal meme that going around that debt was good, and both sides got caught up in making vast numbers of bad financial decisions.

I believe this has to hurt for society to learn the lesson of fiscal conservatism after years of negative savings rates. I don't support the government bailing either side out. I believe there are other options the government can pursue to forestall the banks from making runs on each other and the FDIC.

Dave Barrett said...

Really! Even with price and interest rate brought down to current market values the vast majority of people facing foreclosure would still face foreclosure? So how big, in your opinion, is this vast majority percentage of people currently facing foreclosure that would still be facing foreclosure even with lower payments reflecting current market prices and interest rates? Would it be 80%, 90%, 100%? That "people were buying more house than they could afford" meme must be some powerful juju!

QuadCityImages said...

I'm not sure why you don't believe that there are people doing this. It may not be as prevalent around here, but look at the coasts where housing costs are ridiculous but everyone thinks they can afford a place. Watch some of the shows on HGTV where people spend 4 times their income on a house.

Say you buy a TV at Sears, and I buy a TV at Best Buy, and I get a much better deal with better financing. Do you blame the Sears salesman for tricking you, or was it your responsibility to educate yourself about the market, and find the best deal? Just like a TV salesman isn't in the business for YOU to get a good deal, why would it surprise people that lending institutions aren't looking out for us?

Dave Barrett said...

A salesman has no professional obligations to the customer. A real estate agent does. Also a loan officer writing a mortgage has an obligation to write a loan that does not put the bank owning the mortgage at risk.

The fact that the banking system is about to collapse unless drastic and unprecidented actions are taken prove that a lot of people have screwed up and you want to put all the blame on the borrowers!

Of all the people in the room when a mortgage is created the only one WITHOUT any professional obligation to make sure that the borrower can repay it is the borrower. Surely someone else is to blame other the borrower.

QuadCityImages said...

I never said all the blame goes on the borrowers. I said there's plenty to go around. You're right that the loan shouldn't put the bank at risk, and that's where no one can argue that these banks and lending institutions have made terrible mistakes. I just don't think you can put ALL the blame on the institutional side, just like I don't think all of the blame goes on the borrowers.

I just think that this fits in with our country's recent increase in credit card debt, and other borrowing. People are going into debt too much, and too easily. Since a lot of people don't save anymore, banks have lured them in with 0-down mortgages, which are one of the worst ideas I can think of. The "lesson" I mentioned in the previous post from all this should be a return to standards like a 30-year fixed mortgage, 10-20% down, 3x your annual income, no balloon payments, etc.

Dave Barrett said...

Right! And, of course, the borrowers are not the ones who created the variable rate and balloon mortgages.

QuadCityImages said...

Those (ARMs and balloon payments) are one thing I definitely blame the institutions for. They convinced people that they'll probably move or refinance within the locked-in time anyway, so why worry about the adjustable part. Except then if the value of your home decreases, you can't refinance or sell, and suddenly you can't afford your mortgage.

Considering the number of foreclosures we've had in the QC area without declining housing values, I'd hate to see what would happen here if homes stared losing value like they have in the bubble areas.

lyrl said...

Even if they were all refinanced to fixed-rate mortgages at low interest rates at no cost to themselves, I believe most people in foreclosure now could still not afford their mortgage. Most people were sold on the idea that their home would increase in value, and they would be able to use that home equity to get into further debt to maintain their desired standard of living. Mortgages have ended up being the debt that bit back, but they're just a natural continuation of a live on credit cards, don't save anything lifestyle many Americans have taken up.

Housing prices in many areas of the U.S. are high because demand was artificially inflated: mortgage agents convinced many people who could not afford homes to enter the home-buying market. It was a pyramid scheme, and it's an ugly situation that the current homeowners have ended up holding the bag for a whole string of people who made bad decisions. Unfortunately, the steps that would be needed to keep these people as home owners would continue to prop up the housing bubble.

I agree with QCI that there is plenty of blame to go around, including to borrowers who have some fiscal responsibility for their own household. Still, more blame should go to professionals who were supposed to be educated and have better judgment on these topics.

Brita said...

People should read this.