I’m working on an article for Sunday on homeowners with good credit who can’t afford their mortgages. For a long time the press focused on subprime borrowers, but delinquency data suggest the foreclosure trend has spread up the credit ladder.
As part of that story I interviewed Natalie Lohrenz, counseling administrator at Santa Ana-based Consumer Credit Counseling Service of Orange County.
Lohrenz is as liberal as anyone, she said, but after years of working with people with credit problems she had this to say on the congressional proposal to expand efforts to refinance homeowners out of loans they can’t afford:
“I personally feel the bottom line is we can’t bail out all these people. Then you just have the same problems again. I think we have to let them fail for the market to correct itself. I know there is a lot of pain in people’s lives, and we do what we can. … but expanding (the Federal Housing Administration) is just having tax payers bail people out. If it feeds bad behavior, then you have more bad behavior. The reason why people aren’t making bad loans anymore is because those loans are failing. … I am 100 percent personally convinced there is no way housing prices could have risen as they did without all the exotic loans. Practically everyone I see in counseling could not afford their home on a traditional 30-year fixed-rate loan. How could the prices have gone up (without exotic loans)? You wouldn’t have had any buyers. That’s why prices are coming down, because people can’t get exotic loans. I am not a free market person, but having experienced this firsthand for so many years, I am looking at these mortgages and saying, ‘Oh my God, this is insane.’ … Within reason all these could help the market: lenders willing to help people and lenders being more realistic about values in the market and about accepting short sales. That goes with modifications too. If the house will end up in foreclosure if you don’t modify the loan, (the lender should) be willing to modify the loan and accept a lower balance.”
Related Links:
- OC Register calls on Bush to veto mortgage bailout
- Did the agencies rating mortgage bonds let greed trump common sense?
- U.S. House passes $300 billion mortgage bill opposed by Bush
- Pimco’s Gross says slash mortgage balances
- O.C.’s coming wave of prime foreclosures?
Bailout is a dirty word. What’s wrong with federal efforts to bring lenders and mortgagors to the table, getting the lender to write off the overvalued portion of the note, and getting a new and realistic mortgage (with fed help) for owner-occupant type mortgagors? Banks take a big haircut (no reward for bad behavior there), the home stays occupied (to the benefit of the neighbors, the municipality and the tax man) and the economy benefits overall. (For the saver-renters-first timers, there are already plenty of REO’s and soon to be REO’s to choose from, so no crying there.). This is no handout to speculators, investors or fraudsters. Of course the key is doing it right, and that’s where the scrutiny should be focused.
I used to try and save for my retirement…….after listening and watching the situation with housing, I have decided to spend all my money and not save a penny. When I do retire, if I don’t have any money, I feel confident that the government will take care of me……especially if I whine and complain about how unfair life is……….
To Mikey likes it……………………I agree completely and if we dont do something like that we are kidding ourselves. My home worth 40% less than purchase price and I can make the payments just fine. but, in about 3 years I plan to leave OC to Oregon and will rent it out and eat the monthly loss if need to.
To nanowest…………………….I doubt you actually have any money at all to loose.
Mikey-
Shifting bad lending risks (i.e. borrowers) to the federal gov’t is a taxpayer bailout. There is no possible way to bail out borrowers without bailing out the banks, and really, saving the banks (a special interest with deep pockets) is what it’s all about. I say NO!
Why should banks agree to take a big haircut, when they could presumably take a smaller haircut and better serve their investors?
The lady in the article is correct. Banks are in the best position to determine if modified terms will keep a borrower in the home. In some cases, there is just no solution other than foreclosure, but banks are in the best position to make this determination.
To mikey and gary,
you are both idiots who know nothing about economics and finance. I hope you both lose your homes and end up in the streets as bums.
The Fed commits the tax payers into adverse selection of bad mortgages. The banks/lenders will only dump the worst of the loans onto the Fed and ultimately the taxpayers. If one has to be on the edge every month to pay back at all, the banks will not rework the loan at all. Only the ones with liar loans, the worst of all loans will be reworked and transferred to the Fed. I thought Dodd’s father was prosecuted for some crime when he was in office. Like father like son.
The proposed haircut is much too small at 15%. This represents a direct payment of $300 billion to banks since house prices will no doubt drop by at least 25%.
Many supporters of this bill say agree that it is wrong but argue that it is necessary. They say the economic cost to the nation will be much greater if we let house prices drop. This argument ignores future speculation and bubbles. What is the future cost of new bubbles and excesses which develop since we have ingrained Moral Hazard into the economy.
I am not pleased with families losing homes, but I am even less pleased with those families having bought the homes in the first place. Some argue that this bail-out will help speculators. I argue that anyone who bought a home they could not afford was a speculator.
Think about it. If someone entered into a mortgage with payments they could not afford based on refinancing later on (thanks to rising prices) this means they were speculating. Additionally, rising prices would not make their mortgages affordable. It would imply greater debt and higher payments. The only thing you can do with a home you can’t make payments on is to sell it.
It is not up to the taxpayer to fund a bail-out. It is up the mortgage brokers and bankers who benefitted from the bubble. Billions of dollars were pocketed by builders, bankers, and brokers. They should pay for this mess.
This plan is simply an indirect transfer of money from taxpayers to Wall Street. It will provide minimal aid to homeowners. It is a bad idea but typical of modern America.
“I am not a free market person, but having experienced this firsthand for so many years, I am looking at these mortgages and saying, ‘Oh my God, this is insane.’ …”
What we are witnessing before our eyes is a liberal coming to her senses. When a liberal is given a chance to understand reality, she / he becomes a conservative.
“After working behind the scene in Wall Street and having seen so many fraudulent activities perpetrated on naive investors, I quit and decided to become a teacher, someone who can steer the next generation from such greed and selfishness…”
What we are witnessing before our eyes is a conservative coming to his senses. When a self-centered, self-serving conservative given a chance to understand the consequences of what he has done to others, he becomes more human and sympathetic to others. He becomes a liberal!
Anon, what are you talking about. “naive” investors. The risk are spelled out in the prospectus supplement. If they did not read it, that is there problem and they should not be in a position to make investment decisions.
I think it’s funny that they’re having Senate hearings to pressure commodities “speculators” who have been (allegedly) driving up the price of food and fuel. There were no Senate hearings about housing speculators who drove up the price of houses. In fact, it appears the government wants to prop up the price of houses at the expense of the have-nots. These guys are not very bright.
Matt … you’ve stumbled upon the camel in the tent.
Matt, WHAT did you expect to hear from a credit counselor? Duh! The 95% of people who pay their loans on time don’t end up sitting across from her. Talk about ignoring the obvious.
Nice to see a rational liberal for a change… any way to get you in touch with all the moronic Democrats in Congress who seem hell-bent on socializing the losses?
Mikey,
“What’s wrong with federal efforts to bring lenders and mortgagors to the table, getting the lender to write off the overvalued portion of the note, and getting a new and realistic mortgage (with fed help) for owner-occupant type mortgagors?”
Nothing at all with the government ENCOURAGING this behavior from private institutions. Big problem with the government BACKING this behavior.
Also, the secondary concern is that any effort of any kind to keep housing values where they are (by way of not including the “written off” portion of the loan balance in a new appraisal and thus not setting a new, more accurate comp for future sales) is only prelonging the day when sales of homes comes to a total standstill because no one makes enough money to buy one any more (until salaries catch up). The average joe’s house price MUST fall to a level where they are 3 to 4 times more than the average joe’s income. Period. It will either happen now, or later but HAS to happen.
And those are the 2 things wrong with the suggested plan - government backing the mortgages and artificially high housing prices remain artificially high rather than falling back inline with both rents and incomes.
(Good to see your name back in the comments - always thought you were pretty smart.)
sorry, that’s PROlonging, not PRElonging - DUH!
I too am a liberal who doesn’t like this bailout, but I don’t believe that this Senate bill is particularly “liberal”. I support government activities that reduce inequality by having the well-off (including me) disproportionately pay for public education, infrastructure, health care, etc. I also support well-targeted laws that raise incomes of low-wage working people (e.g., minimum wage) and those who can’t reasonably work (the disabled).
But are poor, underpriviledged people the real beneficiaries of the Senate bill? Why should a liberal want to bail out someone who bought more house than he/she could afford because he/she believed housing prices only go up? Why should taxpayers bail out reckless lenders by agreeing to buy those loans that the lenders think they can’t profit on (which are the only ones they’ll agree to sell)?
Most poor people rent because they can’t afford to own, and they’ll be farther away from owning if this law prevents bubble prices from falling as they should. This law will mostly help middle-class people who acted irresponsibly. This isn’t helping the “innocent victims” that liberals most care about.
jb Says: When a liberal is given a chance to understand reality, she / he becomes a conservative. Listen the very creators of this mess were very proper CONSERVATIVES pushing the free market economy. How is that for REALITY. Sheesh some people think that conservativism immunize you against greed and stupidity and “jb” clearly demonstrate how wrong is that thought.
Fourth Generation-
The bubble was cause by artificially low rates set by the FED. Free markets would have done a lot to prevent this mess, had they actually been allowed to operate freely. BTW, there’s a difference between conservatives and neo-conservatives. NeoCons don’t promote free markets, they just give it lip service.
Liar Loan Says:
May 21st, 2008 at 4:35 pm
Fourth Generation-
The bubble was cause by artificially low rates set by the FED.
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Funny, I thought those 1% teasers and optionARMs were developed and set by the mortgage bankers/brokers/lenders.
We’ve had very low interest rates in the past (courtesy FED), and yet these didn’t induce such stupidity in the mortgage industry.
FreedomCM-
The loan products and teaser rates were created by Wallstreet investment banks. The Fed kept rates artificially low and liquidity artificially high leading to another asset bubble. With low rates in the past, the stupidity occured in the stock market last time around, junk bonds on the 80’s, etc. The Fed creates these asset bubbles as a byproduct of managing the economy. It’s all in the name of preventing recessions and/or deflation.
You’ve got to start looking at the big picture.
Let bail out all the irresponsible people, then the next time, you
will see the disaster to come in this country.
So, next time, when you can sell your house at the high price,then sell it. When you can refinance and take all the money out of the house, then do it.
Government will bail you out, then go to the auction to get
your house back if you sell it earlier.
The best strategy is to wait for the next cycle when house price will go to the sky again to cash out with home equities.
You can buy back later with government help!