Feedback: American Recovery and Reinvestment Act
We here at The National Hustle definitely appreciate feedback and one of our readers left a great comment in response to my post on the American Recovery and Reinvestment Act. Here’s an excerpt from counterpoint‘s comment:
No, you cannot blame people for taking advantage of all-time low rates to get in on the housing boom, but at some point common sense has to come in to play. Which mortgages are the one’s going bad, the 30yr fixed? Not so much. It’s the ARMs that were originated at record low rates that people are mostly defaulting on. People trying to get the lowest possible rate to get the lowest possible payment to get into a house they cannot afford.
I would love to recoup the money I’ve lost in the stock market over the past six months but I just don’t see that happening.
Thanks for the comment, counterpoint.
I think you’ve nailed the argument of the Rick Santelli’s of the world, but this logic is ignoring several factors (either intentionally or otherwise):
- Not everyone interested in buying a home is a financial professional. Consequently, they seek out the advice of those who are and in this case, mortgage brokers are often the individuals offering the advice to first-time home buyers.
- Many mortgage brokers and lenders do not always have the best interest of the borrower in mind. Mortgage brokers and lenders have a professional responsibility to warn their clients about the realities of the housing market and to turn them away if they are biting off more house than they can chew. Not surprisingly, this rarely happens when home values are skyrocketing and brokers are relying on those commissions to put food on the table (or BMWs in the driveway).
- It’s not always about not being able to make the payments. In some regions of the country, home values have dropped to 50% of previously appraised values. In these common cases, a lending institution wouldn’t even let you in the door to discuss a refinance…even if they had provided the original ARM loan.
So, who cares? if you’re not getting bailed out on your investment losses or the decrease in your home value, why should anyone else? Right?
While the first two points above largely relate to the unfortunate labeling of people as “idiots” and “losers” due to elements potentially beyond their control, the third case presents the real rub. Underwater ARM loans are a significant problem for both borrowers and lenders, the true impact of which will continue to flush out over the next few years as the 5-year ARMs reset.
From the borrowers perspective who may have lost half the value of their home in the matter of 3-4 years and knows a standard re-finance is not an option, they may be inclined to simply walk away from the poor investment and let the lender claim the secured property. This process would damage the borrowers credit (resulting in perhaps a 200-300 point reduction in their FICO score and an inability to get a decent loan for 5-10 years), but this might be favorable to waiting 5-20 years for the property to recoup its lost value while paying on a variable interest loan. This may be considered moral hazard, but it’s a rational response to a seemingly irrational market.
Now, what are the lender’s options?
- They could claim the abandoned property, sell it for fair market value, and eat the portion of the unpaid loan. In addition, they will incur roughly $60-90k in costs related to the foreclosure and resale process. Naturally, the idea of netting $110k on an original loan of $400k cannot seem financial favorable to a lending institution.
- The other obvious solution that is favorable to both parties is to renegotiate the terms of the loan. Up until now lenders have been rather modest in their debt forgiveness, but when presented with the increasingly common disaster scenario above, modifying the $400k ARM loan down to a $300k, 30-year fixed loan and keeping the borrower in the house is a mutually beneficial solution.
While it’s difficult to see how the American Recovery and Reinvestment Act will impact lenders and borrowers, it appears appropriate for both sides to accept their share of the blame and take the appropriate steps to minimize foreclosures and moral hazard.
The survival-of-the-fittest and you’re-an-idiot-for-not-knowing-any-better arguments are natural responses to a seemingly unfair allocation of taxpayer money. But the reality is that our economy as a whole may be better off helping those homeowners who really stepped in it, whether they understood what they were getting into or not.
- Matt
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I see what you are saying, but like all debates there are more issues that should be considered than the ones used to try and make a sound response. First. You are trying to portray the borrowers … or should i say patriotic human beings just trying to fulfil the american dream (is that more personal and emotional than borrower?) as the victim, taken advantage of by slick dealing brokers with dollar signs as pupils and a cash register cha-ching sound for a thought process. However you continue to come back to and refer to these houses as “investments”. Make up your mind whether its the payments or the loss on investment that people should saved from. You pointed out that an “obvious” solution to renegotiate a new mortgage based on the new home value is in the best interest of both the lender and borrower … why? if housing prices continued to rise could they increase the value of the mortgage? no. If you sold your house three years ago and someone came to you asking for a refund of the difference in market price and purchase price would you give it to them? not likely. Whats happening is a reality check to the American dream. Oh no, people are actually paying to live in places where they aren’t making money under terms they agreed to on documents they signed! sounds like your main issue is being under water on an INVESTMENT. A lot of people pay a lot of money each month on properties they wont make money on – they’re called renters. Yes housing prices are down but its not like the ARMs people signed X years ago are killing them … if the nationalhustle doesnt know, rates cannot get any lower so any rate the ARM is tied to is most like lower than it was when people took on the mortgage. But interst rates are going to rise, you complain … yeah – probably right about the time housing prices start to rebound.
Ok moving on from you failing to make a sound argument … the truth is both borrowers and lenders are to blame for this. I am not going to defend lenders but definitely dont agree with your i went to the store for a sandwich and came home with an option ARM mentality. Yes lenders engaged in questionable practices but people still lined up for their products – they weren’t sending mobsters out with guns forcing people to take them on. People did anything they could to get loans.
so what happened. Lenders started coming out with new mortgage products to allow people to achieve this american dream of home ownership. The 15yr became the 30yr became the 40yr became the interest only became the option ARM. Longer terms and less (or defferd) principle translates into lower payments. Lower payments allow people to budget for bigger houses than they could. Pretty much mortgages became rent until you want to cash out and move on since very little if any was going to principle. People stopped buying houses to live in with the hope of one day owning it free and clear and started using it as a means to make a quick profit. Also, housing prices are way over-valued right now becasue as people get the newest cheapest mortgage they bought bigger more expensive homes. The huge volume to real estate drove up prices at unprecidented rates … all based on mortgage products that are now frowned upon as predatory lending. Yes it was stupid for banks to offer these while at the same time relaxing undewriting standards but plenty of people lined up knowing full well what they were doing and loved the banks for making the purchase of their house possible. Why should we preserve current prices? they are fake. they are based on products that we all agree are bad. They are artificail highs that must come down. How has the world turned to where when we lose money in the stock market its ok since its for the “long term” but housing prices tank and people that bought houses a year ago are practically demanding refunds for buying at full price prior to the nation wide home sale – take your pick all home now 15-30% off! what happened to the long term.
Yes, there are a lot of different situations out there that do not fall into my points … but there are many that dont fall into yours as well. I will admit there are many people out there that did not fully understand what they were signing up for and were pressured or hurried. Many that were assured by “experts” that prices would rise and that it was a great time to buy. And also, naturally people all have housing needs at different times so some ended up buying at the wrong time. But it still comes down to people wanted to buy and banks wanted to lend … it was the perfect marraige of irresponsible ambition. So who’s to blame and who do we help? Well i think its pretty unpractical to think we can sort it out by having a group decide which mortgages get help and which ones dont. That takes a lot of time and a lot of money – and frankly nothing that comes out will be considered “fair” by all. some wont want bailouts – people that are fine in their houses and current renters with hopes of buying a house a future lower levels and some do – people with arms and those who are underwater … and im sure between each group people will find more ways to blame each other and cry about it not being fair.
The point is yes we are in trouble as an economy and country, and yes something should be done. But anything that is done will not be well recieved by all because of the diversity of people’s personal situations. There are those that are “idiots”. There are those that got greedy. there are those that were just plain unlucky. Fault can be put on lenders for loosening standards and creating potentially harmful mortgages and it can be placed on the people that used them to drive up housing prices at astronomical and unsustainable rates. I also think its ironic that a blog that swings right more than it does left appears to be asking for government to step in and take a bigger part in this mess. The quick fix world we live in today is just going to have to be patient because its going to take time. With the stock market jumping and falling 15% a day based on some new bit of hope or doom people dont want to wait. They want it to all be over and better tomorrow. They want to wake up from this nightmare, and sadly i think people would be more than happy to repeat the whole thing over again while thinking to themselves “this time i’ll get out at the right time” …
Great comment, counterpoint. Four thoughts:
(1) 1,183 words…very impressive.
(2) I’ve never bought the Pepsi/Coke argument that the unhealthiness of their product is justified because it’s what the customers want. Just like interest-only, 3-year ARMs, people didn’t want those products until they were offered to them. Not the other way around.
(3) What is your suggested solution? No intervention, unaddressed systemic risk, and rampant corporate failures? I love proving a point as much as anyone, but I don’t see that approach as politically or economically prudent.
(4) “Swings more right than left”…classic. I think that will be our new tag line.
Thanks again for the comment. Keep ‘em coming.
- Matt
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