CapitalistMarks

The good, the bad and the sad.

Posted on 26. Jan, 2009 by scott in economic daydreaming

?Economists all over the country are promoting a government bailout of homeowners who can?t afford their mortgages.? What do you think?? Should we reward consumers who get in over their head?? Should we treat people who bought more home than they should have as victims?

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Does anyone win in a world where bad decisions are rewarded?? Yikes, I guess we all do.? At least the bigwigs can blast their stockholders and the owners of their debt and still get to fly ultra-class in their fancy private jets with caviar snacks and Coke in a bottle and get annual bonuses in the millions of $ even when their company stock collapses under the weight of huge loses they caused.?

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Jezz, where is the justice???

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But, the fact is we can?t reward everyone who made bad decisions and that goes double for home owners.? Hey, if you are in over your head then get out.? Sell.? Buy a home you can afford.? But don?t put the burden of your error on me and the rest of us who worked hard and paid mortgages for years and still live in modest and comfortable homes (at least to us).? There is an answer and I’m not the only one who thinks the government is barking up the wrong tree.? There are lots of blogs out there about his that you can check out, but one has a story of abuse that really strikes a chord.? It is by Eric Ames and is worth reading.

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So, what do we do?? I?ll tell you with an example.? This is a micro tale about a macro problem and you have to realize that all the numbers get multiplied my millions or billions in the real economy.

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Lets say there are a thousand homes out there where the mortgages can?t be paid.? Let?s say that the average mortgage is $175,000 (CNBC today said that is the average home price in the U.S. now).? The total mortgage value is then $175,000,000.? The problem is that 10% of the owners can?t pay.? So $1,750,000 or 100 homes are in trouble.? And lets say that they are in over their head by 20%?– so that is?$350,000.?

DON?T bail the owners out at a taxpayer cost of that $350,000!?? Let the market (banks?etc.)?deal with it and we all benefit ? even the owners who are in over their heads.

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Here?s how.

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First the taxpayers don?t pick up another $350,000 obligation (remember to multiply that by millions or billions!!).

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Second, the owners tell the banks (or fannie and Freddie– but you get the idea)? that they are going to walk–unless the bank negotiates with them.? Now the bank has a choice.? They can lower the mortgage value and/or the interest rate to a point where the owner can afford it (that 20%) and the writeoff ?the bank will take is less than the cost of going through a risky foreclosure and sometime (who knows when) selling the house (probably for less than the net mortgage they now own less costs of foreclosure and selling).?? Hey, even convert to a 40 year mortgage to make some of the loss back.? (Think of the variety of options)

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If the owner and bank can work out a deal then they both win.?

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If they can?t work out a deal they both win.?

Here?s why.

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The owner walks away and finds a house that they can afford.? There are lots of?homes out there (CNBC also informed us that there is a 9 month supply of homes for sale ? does it sound like?sellers and banks are willing to make a deal right now?).? By the way the mortgage rates are near all-time lows so the house the ousted homeowner?buys will have even lower monthly costs.? Or in the event they can?t find a house they rent until they can.? That is the way self-reliance and personal financial responsibility works.? It is how we learn . . . from our mistakes.? Turn the page and move one.? Worst case:? the buyer has learned a lesson.? Best case:? they find a house just as nice as their old one?for less money . . . maybe even the house they left (after the bank cuts the price and lowers the interest rate so it is newly affordable) of course there would be the cost and hassle of moving out and then in?horrible to think about. But, hey, they were willing to take the risk.?

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What about the bank(or whoever)?? Well, they save the money of a foreclosure (see above) and that is usually a bundle.? Plus at worst they take over a house and put it?on the market at a much lower price.? Sure the house sells (whenever it does) for less money and the bank will have to take a write-off, but it is a lot less than if they had gone the foreclosure route and then tried to sell it.?

That?s the way corporate finance and responsibility works (or should).? Worst case: the bank loses some money.? Best case: the bank loses some money (and the loan officer and his boss get fired).? But, hey they were willing to take the risk.

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Let the market handle it President Obama.? Or else, if you are going to put millions in the pockets of those who made bad financial mistakes then make sure you give the same amount to those who chose well (do it in the way of a homeowners rebate).

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Yeah.

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The good, the bad and the sad.?? That?s life.? Live with it!

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thanks to leo-seta for the photo from flikr

Tags: bailout, housing solution, mortgages