Federal Government Bailout of subprime mortgage crisis

[bjl584]

Any thoughts or opinions on this issue? I think that the governments plan to act on this is shortsited at best and will only serve to raise interest rates on loans in the future. Everything revolves around the legality of contracts and claims to assets. When the government steps in and "forces" lenders to lock in interest rates, this will challenge contract law and make lenders nervous about lending in the future. Also, from what I can tell this doesn't really do anything to solve the problem. It is only going to prolong it. What happens after the 5 year interest rate freeze has expired? I would argue that we are right back where we started.

[TheTexan]

You are absolutely right. Even with the proposals in place, only a small amount will be able to take advantage. There will be over $380 Billion in mortgages reseting next year. What's worse, is what it is doing to the housing market. Hope no one is planning on selling their house in the next few years. As homes forclose and sell way below market value, guess what the comps will be in your neighborhood. Thats right. We are in for a ride.

[Sporkman]

They did a piece on NPR today about it, saying that people who made the right choices re mortgage terms are offended that they're not getting any bailout, whereas the less astute borrowers are.

[disneysteve]

This is an incredibly complex issue with far more wide-reaching implications than the average person realizes. I'm troubled by the government bail-out that has been proposed, but I've learned enough about the topic to appreciate that something really needed to be done because of the ripple effects the problem is causing.

I initially thought if someone bought a house they couldn't afford, they deserve what's coming to them when the rate resets, the payment jumps to an unaffordable level and they end up losing their home. But I realize now that it just isn't that simple. Losing that home doesn't just affect the people living there. It affects the lender. It affects the neighbors. It even has public health implications when, for example, swimming pools in warm climates are left uncared for and become breeding grounds for mosquitoes. It affects responsible homeowners nearby who are trying to sell their homes. Would you want to buy a house when your potential neighbor's home has a dead lawn or a totally overgrown lawn and a swamp for a pool? And look at the mess we've all been dealing with on Wall Street.

Will the bailout help? Sure. It will help certain people. It may keep payments affordable long enough for them to sell the home or possibly refinance the loan to a fixed rate. Five years from now, hopefully, a lot of these folks will have moved on to homes they can actually afford, so we won't be right back in the same situation, at least not on nearly as large a scale.

[Joan.of.the.Arch]

Bail out or not bail out, there are going to be bad effects on us all, I think. It does make me mad that the sloppy-careless (at best), greedy (at nearly worst), maybe criminal (FBI is looking) actions of buyers and/or financers and appraisers can end up affecting the rest of us who read every word of our contracts and made sure we could handle the terms before we signed.

Yep, as of last month, there is already an empty foreclosed house on my street. I wrote earlier this year that there was another empty house with a window broken out; I don't know what happened there for the house to be empty. I sure do not need this to spread. I already take care of the empty place next to me, in part to be nice to my friends, the distant owners, but in part out of self-interest. An empty house can become a wreck and a dangerous nuisance which can affect the whole neighborhood in almost no time. I keep up this place and make it look lived in, but are my other neighbors going to do the same for the empty houses next to them? Are the repossessing banks going to do it? I doubt it.

Then there are all the jobs that will be fading out as homebuilding slows, remodeling slows, and even repairs and maintenance of people who can't afford their homes slows.

[project15]

I have normally supported president Bush, but this is the first thing that I completely object to. I'm in the process of looking to buy sometime this spring. This may sound inconsiderate, but I was hoping for the foreclosures to drive down prices back to a reasonable level. With that being pushed off for another 5 years, prices will just remain at their inflated rates for another 5 years.

Where's the reward for a responsible 20% down payment, 30 year fixed rate purchaser like me? No where. Prices remain high, all the people that bought with 0 down and bought outside their means are being rewarded.

How can the Republican party support an idea like this? I thought they were all about less government interaction?

[Joan.of.the.Arch]

I'm speaking without any real knowledge, but I would guess there will be many people who are not going to qualify for the new program so there will still be foreclosures and pressured sales that won't meet the original price of the house. The house bargains are still going to be out there.

I just wonder where cousin Jim-Bob will go? Jim-Bob who was ignorant enough to buy a house he couldn't afford, and complacent enough not to have refinanced to a fixed rate in the years since he took the loan.

[disneysteve]

I'm speaking without any real knowledge, but I would guess there will be many people who are not going to qualify for the new program so there will still be foreclosures and pressured sales that won't meet the original price of the house.

The report I heard said that the proposed bail-out would only affect about 10% of sub-prime mortgage holders. So you are correct. The other 90% will still have to find their own way out of the mess they've gotten themselves into.

[gackle]

Where's the reward for a responsible 20% down payment, 30 year fixed rate purchaser like me? No where. Prices remain high, all the people that bought with 0 down and bought outside their means are being rewarded.

How can the Republican party support an idea like this? I thought they were all about less government interaction?

I completely agree. This isn't the president we elected in 2000.

[sounderella]

Alright, now by no means do I know everything about real estate. However, I was smart enough when I bought my house 1 1/2 years ago to go the 30 year fixed route. I am 24 and have great credit but do to my lack of extended history I had to settle for an FHA 7%. I cannot wrap my head around these people who did the interest only and ARM loans. Really the only reason you would do these if like you were flipping a house and turning around and selling it in a short time. These were offered to me and the first thing I said was "What? Why would you do that if you're gonna live there? You don't know what the market will be doing in 5 years...nor do you know where you're gonna be in 5 years. Not only that, but in theory you would still be "renting" you wouldn't own any part of that house....no thanks" Not only that but these people bought houses they knew they could not afford. For me, when making plans to buy my home I did a lot of googling and a lot of calling, taking notes and making people explain things that I didn't understand with kindergarden terms. You just can't jump into buying a house and I can not believe these people got into this kind of trouble and I especially cannot believe these banks allowed it!

My other point would be, with an FHA loan you are required to pay mortgage insurance.....why wouldn't a bank require that on a loan that they know is too much for someone or just a loan in general regardless if it is FHA or conventional. If I was a bank I think I would be doing everything I could to protect my butt.

Never would I want anyone to lose their home....but dang you have got to do your research. Now because they didn't, they're ruining it for the rest of us plus the first time homebuyers who didn't get in before this happend. Good word of thumb, if it sounds too good to be true, it probably is.

--------End of rant-----------

[FrugalFish]

The thing I've been wondering about is people who get a freeze on their mortgage rate, but also have loans that are reverse amortizing. Aren't these people going to be in a bigger world of hurt in 5 years when their loans are worth say $100K more than they are today? Doubtful the homes will appreciate adequately in that same time frame for a sale to pay off an inflated loan. Perhaps these people do not qualify for help?

I tend to agree that if people are in a home they cannot afford, a time will come when they have to pay the piper- whether it's now or 5 years from now. With the gov't prolonging the pain, perhaps it will be even worse in the end.

[project15]

My other point would be, with an FHA loan you are required to pay mortgage insurance.....why wouldn't a bank require that on a loan that they know is too much for someone or just a loan in general regardless if it is FHA or conventional. If I was a bank I think I would be doing everything I could to protect my butt.

Well, I'll put an ease to this part of your rant - you are normally required to pay PMI (mortgage insurance) on any mortgage where you put less than 20% down, not just FHA loans. You can avoid PMI by getting a piggyback loan in which the second smaller loan is usually a higher interest rate. So, these people are either paying the PMI or higher interest rate on the second smaller mortgage.

[cptacek]

What bothers me is that these people signed a contract. If a contract like this is not worth the paper it is written on because the government can force the lender to capitulate, how can we trust any contract?

[Joan.of.the.Arch]

I'll admit I really need to read up on this, but I doubt the lenders are being forced. Sometimes it is in the interest of both borrower and lender to renegotiate the terms, even when their is not a nationwide crisis. My question is how can the lenders re-negotiate when they have re-sold as packaged securities (I think) at least part of the profits? Other people now have ownership of the loans. Can the lenders change the terms of the loans without the consent of the people who have some of that ownership now? This includes mutual funds, institutional investors, and individuals from all over the world. If the ship is sinking, I think everyone who was aboard will want to climb up on the biggest raft or flotsam they can get a hold of.

[threebeansalad]

I agree with Disney Steve. This is a complex issue with ramifications far beyond real estate. We have a duty to intervene for the benefit of the common good.