I imagine we will hear quite a bit from Obama and McCain tonight about their plans to bail out homeowners who are “under water” - i.e. owe more on their mortgages than the property is worth - and those who can not afford to make the monthly payments required on these mortgages.
While I sympathize with homeowners who are under water and/or who can not make their payments, it is my belief that there is no plan that will actually solve the problem and that will be fair to ALL homeowners INCLUDING the large majority of Americans who are on time with their mortgage payments.
Let’s look at homeowner A and homeowner B. Both A & B purchased their home for $500,000 say 2 years ago. Homeowner A put $200,000 of their hard earned cash into a downpayment and took out a $300,000 loan. Homeowner B put ZERO money down and took out a loan for $500,000. Both bought the same house in the same development at the same time.
The market value of these homes is now $350,000.
Buyer A has actually lost $150,000 in equity - lost $150,000 of their hard earned $200,000 cash they put in to buy the property. But they are NOT under water - they now owe $300,000 on a house worth $350,000 AND they can still make payments on their $300,000 mortgage.
I am not aware of any plan that has been proposed to help homeowners like buyer A who have actually lost THEIR OWN MONEY as a result of their home purchase.
Let’s contrast this with buyer B.
Buyer B did not put ANY CASH of their own into the property so they have NOT LOST any of their money but this is the homeowner the US government is going to bail out assuming any homeowner bailout plan is passed. Of course, the overwhelming majority of Americans who pay their mortgages on time will pay for this bail out. Is that fair?
So let me understand this.
Buyer A who has actually lost money on the purchase get NO RELIEF while buyer B who puts no money into the purchase gets relief in the form of some sort of mortgage reduction to $350,000.
Does that seem fair?
My sense is to just let the market take care of it.
The lenders will foreclose, people will lose their homes (in most cases, they will not have lost any cash - most of these owners put zero money into the purchase or in other cases, many these buyers did put cash into to buy their homes years ago but since that time have taken out their equity in the form of a home equity loan), the lenders will foreclose and then sell the property at a loss. The lenders or the investors who bought these loans will suffer a loss - which is just the way it goes - they obtained very high interest rates on these loans because everyone knew they were risky loans and now their investments have gone south - so be it - that is the way it is - they took a risk in search of high profits and lost!
The buyers who purchased with no money down WILL NOT LOSE any of their own money and actually they will have just paid rent to live in their house for a few years.
Without a bailout, the US taxpyer will not be on the hook to bail out some homeowners and not others.
The other fact that most of these Washington DC politicians do not seem to get is that most of these homeowners in trouble could not afford the payments even if their mortgage balance was cut in HALF.
I imagine many my find me cold-hearted but honestly, I do not see any bailout that will work and that will be fair to ALL. Any bailout will only cost the US taxpayers lots of money and in the end, it is my belief that the bailout will actually help few if any borrowers.
7 responses so far ↓
1 Jill Aster // Oct 22, 2008 at 4:11 pm
Great post. Really captures the unfairness of a housing bailout if there will ever be one. I hope our leaders have the sense to think it through. I suggest you send this to Obama and McCain compaigns.
2 Bill J. // Oct 31, 2008 at 7:28 am
You nailed it. I agree that it won’t work and there may be a backlash when people wake up to what is happening. Do you have any predictions on what this govt intervention will do to the personal real estate market long term?
3 LW // Nov 12, 2008 at 4:45 am
You are so right! Unfortunately, what you feared is going to be happen . Read this article: http://online.wsj.com/article/SB122641622440217445.html?mod=article-outset-box
4 Mary in New Hampshire // Nov 12, 2008 at 8:17 pm
Finally someone who is saying what I’ve been feeling. I actually have been angry for days. I put $76,000 down on the house I bought 2 years ago. I bought the lowest price house on the street that I moved but still paid a good amount of money. The house next to mine is on a lot that the builder wouldn’t sell to anyone because it was the best lot with the most amazing views, he was greedy and anyway I was the last person to buy a house in this development 2 years ago. So the builder just sold this lot and is building a house overlooking mine with fabulous views (a much bigger house than mine, etc). and they are paying not much more than I paid for mine. My property is worth about 50k less than it was when I bought it. The people who bought the lot next door have actually been so smug about it and even “rubbed” it in that they got the best lot on the street for less than everyone else (except me because I bought a smaller house). Anyway does it sound like I am jealous, well I AM, very much, I admit it. But I also am furious that someone else who may have bought a house 2 years ago and paid zero and got into a bad loan that the banks are talking about not just changing the loan terms but actually lowering the principle that they owe because the value is lower. Hello, the value on my house is lower too *and* the hard earned cash that I put down has evaporated. I could have put zero down too, I have excellent credit, I could have done that also but because I did the right thing I end up losing. I know I am whining but I am really really really upset about this, I feel like crying. 76,000, I had to work for years to earn that money. I didn’t take vacations, I lived beneath my means, and so forth and for what to see some dope get bailed out.
5 Shaun C. // Nov 13, 2008 at 1:28 pm
What is happening to our country???????????
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