Sunday, December 2, 2007

Plan to Bail Out Subprime Mortgage Holders

You might have read about plans to prevent certain subprime mortgage rates from "resetting" to higher rates in the next few years in the papers lately. If you have, you fall into one of two camps. The first camp is people who have subprime loans and are terrified of the reset that's coming up because it will push your mortgage payments up to unaffordable levels. If you're in the second camp, you're angry that idiots who took out bigger mortgages than they could afford to buy homes they couldn't afford will be bailed out, preventing them from being forced to sell and allowing home prices to come back down to more reasonable levels.

If you've read my prior posts about buying a house, you probably know that I'm firmly in the second camp. As I talked about in "The Subprime Mortgage Default Opportunity," I thought these painful resets would force people to sell and help the housing market to correct.

Don't get me wrong, I'm in favor of helping the needy. People whose homes were destroyed by a natural disaster deserve to be bailed out. People in other unfortunate circumstances deserve to be bailed out. However, people who bought houses they couldn't afford do not deserve to be bailed out.

So where are we in the bubble/bust cycle? I've been following some interesting posts in a blog called "Misha's Global Economic Trends Analysis" and I think he has a good illustration where he overlays the US housing market on a graph of Japan land prices during that country's bubble and bust from 1980-2004. According to that chart (and most experts), we're in the early stages of a decline. I don't know for sure what to believe, but I sure hope it falls a lot further so that honest, hardworking people can afford to buy a decent house to live in.

By the way, my current favorite source for housing market related news is Patrick.net's Housing Crash News. Its updated daily with stories around the web about the overinflated housing market in the United States.

3 comments:

Anonymous said...

How a natural disaster any different from the Subprime mess? Most homes destroyed in natural disasters are in areas prone to natural disasters. If everyone lived on high ground, there would be no floods. Most bad outcomes start with bad choices.

With respect to the subprime mess, you fail to address the other people who would be harmed by a meltdown in home prices. If all the subprime loans default, we all lose as our homes depreciate.

Just a thought.

TFB said...

I'm in the second camp too. To people in the first camp, I say

"A deal is a deal. The adjustable mortgage you signed up called for an adjustment after the first few years. You knew that. You could've got a fixed rate mortgage but you didn't, because you wanted a lower payment for the first few years. They honored their end of the deal. You did pay a lower payment. Now it's time for you to honor your end of the deal. If you don't want to pay the higher mortgage, sell it and rent. Let someone else buy the house and pay the mortgage."

MoneyMan said...

Point taken from the anonymous poster who wrote that most homes destroyed in natural disasters are in areas prone to natural disasters. However, I still look at them differently. Natural disasters are not inevidable. People buying a house in kansas don't know that two years later on June 30, a tornado is going to rip their barn to shreds. For the most part, they also don't approach a home purchase like that as a "get rich quick" scheme. And also, they might purchase insurance to protect them in the case of a natural disaster.

People buying a house with a low "teaser" interest rate, signing a contract that says it will increase in a few years (knowing full well they won't be able to afford the increased payments and banking on even more home price appreciation) do know what's going to happen and when. And many of them who took out these kinds of mortgages were real estate speculators who drove up prices in the hopes of making a quick buck. They never intended to live in the homes, and even if they did, they only wanted to be in there a short time to help with their capital gains treatment.

Also, I'd like to address your second comment. I didn't address this in the post.

You say "If all the subprime loans default, we all lose as our homes depreciate."

If you bought your home as a place to live, and the market value declines due to subprime defaults, and you have a mortgage you can afford, it has ABSOLUTELY NO IMPACT ON YOU. You already paid for your home. Unless you desperately have to sell your house, a temporary decline in market value doesn't mean jack to you. You can still sleep there every night.

The vast majority of people who would "lose" if every single subprime mortgage defaulted would be either 1) those who couldnt afford a home to begin with (and therefore should not be owning one) and 2) investors and flippers who were speculating. I would love to see them shaken out of the market. That's the way capitalism works.

Of course, this could cause ripple effects that might run through the economy, but just looking at the housing market alone, honest, good-money buyers earning enough money to make a sensible mortgage payment should not care if the market value of their home declines. That's what happens in markets. Prices fluctuate. If the house you bought for $250k is now appraised for $200k, that is not money out of your pocket.

And TFB, thanks for your comment, I couldn't have said it better myself.