In the midst of the financial crisis, I think we've lost sight of the real victims here--people trapped in a housing debt prison:
...they were counting on increasing income and increasing home prices to finance their lifestyles and their family's future. It isn't going to turn out well for them.Even if these people get a workout that allows them to stay in their homes, the terms of the workout are not going to leave them much to live on. Any workouts are going to have the highest possible DTI the government thinks you can handle (currently 38%,) and to qualify for the workout, the homeowner must give up half their future appreciation -- if there is any. Most would be better off walking away. Anyone paying 38% of their gross income (that is gross not net) to their housing costs, plus trying to finance car payments and credit card debt is going to find it very difficult. This is not going to be a short-term condition... Many of us have had to tighten our belts during the recession, but these people will not see any improvement in their finances when conditions improve....
The pwned group is facing a life of indentured servitude to massive debt obligations and little or no hope of financial recovery. Those that lost their houses will have to deal with bad credit and feelings of failure. I can't decide which group I would rather be in. Neither alternative is very enticing. I am very thankful I was one who did not participate.
While many will blame the people in this situation, and argue they should have known better--and many 'ordinary' people did know better--I think many people aren't financially sophisticated enough to have known better. I don't mean this as a slight--there are plenty of things I don't know about or keep up to speed on. But one reason that arguments about broadening 'economic choice' fall short (e.g., health insurance) is because the assumptions and knowledge needed to make a good choice are often lacking. Combined with wishful thinking and willful ignorance, this can be a toxic mix. Fewer options, especially when failure is a disastrous option, is not necessarily a good thing. Most people don't want to be financial wizards, as hard as this may be for some to believe.
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It must be a dreadful situation to be in, but I am continually being amazed at the proportion of the population that seems to have no appreciation for numbers, or in this case is it foresight? I do not know exactly how these low initial interest mortgages work, but I suspect that even if everything had gone according to plan many people would have found it difficult to continue to make the payments past the low interest stage.
BTW: Did you intend to write "Fewer options, especially when failure is a disastrous option, is not necessarily a bad thing.
The notion of protecting the less knowledgeable is a real problem in a free society. We certainly don't want to ban every kind of transaction that exposes people to financial loss. That would bring small business to a screeching halt, and prevent people who are knowledgeable from taking advantage of a broad variety of opportunities. Do we then have two classes of people? This is done to some extent. There are a variety of investments that are open only to "qualified investors," typically defined as those with a seven-digit net worth. That's a crude measure, though it is hard to think of how else we would decide beforehand who is knowledgeable. I've seen many people who are educated, and who had significant net worth, lose that from stupid decisions.
There is a sense in which social security is the intended safety net to protect people from their own financial mistakes. It provides a base income to retirees, independent of their own past frugality and investment acumen. And that, of course, is the argument against privatizing it. One of its chief purposes is to hedge against the risk of each individual making a mess of their financial life, and privatization defeats that.
I find it hard to sympathize with the segment of the population who attempted to use the real estate market as a "get rich quick" scheme. They knew, or should have known, well enough that they were taking on enormous risks. They either were too lazy to do the proper research, or they found the risk acceptable.
Instead of bailing out these people, who through their own actions, were broken ... why haven't we significantly bailed out the people who were screwed, through no action of their own, by the criminals who ran Enron and WorldCom?
The greedfuck financial institutions fucking BEGGED these poor motherfuckers to take mortgages that could only have ever been paid off in the case of a completely impossible continued rise in home prices. Don't blame the victims of this massive greedfuck moneygrab.
What really rankles is that now the US taxpayers are gonna foot the bill for a last-gasp final greedfuck moneygrab NOW!
http://physioprof.wordpress.com/2008/09/23/last-ditch-plutocratic-greed…
http://physioprof.wordpress.com/2008/09/28/700-billion-greedfuck-moneyg…
I suspect the biggest errors of modern economics come from neglecting information costs.
I don't think that any sort of major bail out for homeowners is a wise or fair idea. It's not going to solve the larger banking crisis, it will reward poor decision making in an environment where plenty of people did the right thing, and it will help keep housing prices too high for the average person to reasonably afford. People went into suicidal amounts of debt to get into homes. Homes are still dangerously overvalued in a lot of places. We shouldn't be trying to keep the house market overpriced to protect people who made mistakes. That just encourages more bad borrowing for overpriced assets.
I'm also not a fan of banning the more exotic mortgage options. They're useful to financially sophisticated borrowers, and in the long run, it's probably best to allow people to choose the debt instruments that are best for them.
I think that the right way for the government to handle this is to come up with a family of "standard government approved mortgage packages" that would carry some sort of a seal. If you, as a lender, develop a contract that meets certain standards of transparency, debt to income ratios, sensible down payments, reasonable interest rate schedules, etc., you should be approved to put that seal on the front of the paperwork. Train people to look for that seal if they're not in the market for a "pint of blood and your firstborn" mortgage. It's just like looking for the FDIC symbol on a savings account. That symbol gives you peace of mind that you're getting a square deal with no hidden gotchas. That leaves a deep end of the pool for the few to play in while creating a large and recognizable shallow end for everybody else.
I think it's unreasonable to talk about people who "should have known better". Screw being uninformed: it is unreasonable to expect ordinary people to be experts in something that is not their field. That is why we *have* experts. Yes, when presented with this loan, maybe someone's instinctive reaction ought to have been "Hey, this sounds fishy" -- but when the loan officer sits you down and "explains" to you how you can't possibly lose money, the *reasonable* thing to do is to defer to the expert. I mean, do you second guess your doctor when he diagnoses you? Then where do people get off saying that these mortgagees should have heard their banks tell them that this loan was right for them, and say "Gee, I know you're in the business of doing this, and you have all that training and experience, whereas I've never owned a home before. But I'm going to go with my gut over your expertise."
I think it's unreasonable to talk about people who "should have known better".
If you're going to take on hundreds of thousands in debt (most often in the hopes you'll be able to turn it around to great profit), you better damn well know better. Sheesh. Is there no one who doesn't believe in the word responsibility nowadays?
Oh, and Ross ... I heard the same stupid story about ARM's when I was house hunting ... about how great they were, and how there was no way they could go wrong. When I asked if they could tell me exactly what my interest rate (and hence, my payments) might be five years down the line ... and they couldn't ... the ruse was up. If you're not going to ask the intelligent questions, and put in the leg work to study up on the risks/rewards, you have no business taking risks which can ruin your life. It's that plain and simple.
Oh, and there is such a thing as a "second opinion" when you don't like something your doctor tells you. God damn, that there are people who still continue to put blind faith in people of authority is scary. SCARY!
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