Why should Bush bail out greedy buyers and greedy lenders who got caught when the music stopped?

Question

Both were trying to "flip this house" and did not know when to quit. Now, they should pay the price for their greed. These were not "poor uneducated" people being taken advantage of ($700k homes are not bought by such people). These were well educated middle income earners who's eyes exploded over the prospect of instant equity which is simply a number on a piece of paper.

Your thought please.

Answer 1

He shouldn't. In a "free market" society, lenders who make bad choices must live with those mistakes. The US government should not be bailing them out, nor should the government be a middleman for debt collection. Below is an excerpt from the book "The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer." Enjoy!

When the nanny state conservatives wanted to stiffen the personal bankruptcy laws, they managed to effectively control the terms of the debate. They framed the issue as being a question of responsibility, in which people who had borrowed large amounts of money had an obligation to pay off their debts. The opponents of the measure were the bleeding hearts who pointed out that the vast majority of personal bankruptcies were the result of illness, job loss, and/or family breakup. They pointed out that the cases of people racking up huge bills on wild spending sprees or just straight out deadbeats who were trying to evade their debts were exceptions, not the typical bankruptcy case.1

Of course, it is reasonable to ask about the circumstances that push people into bankruptcy before taking steps to impose harsher bankruptcy rules, but it is also reasonable to ask about the creditors who lend the money. The banks, credit companies, and other financial institutions supposedly make their profit by being able to accurately assess credit risk. That is the whole story of being a financial intermediary. Savers put money in a checking or money market account, buy a CD, or lend money in some other form to a bank or other financial institution, which then turns around and lends the money at a higher rate of interest to a business or individual who wants to borrow.

The bank gets a higher rate of interest on its loans than the people who deposit money in its accounts because it is supposed to know what it is doing when making loans, whereas most of its depositors have no expertise in this area. If it turns out that everyone is defaulting on loans from banks and credit card companies, it is evidence that they are not effective in recognizing bad credit risks. In a market economy, we should want lenders with bad judgment to go out of business. After all, if these lenders can’t distinguish good credit risks from bad credit risks, then it is bad for the economy and bad for society that they stay in business. It means that credit is not going to the best possible uses.

But instead of having the incompetent lenders go out of business (actually most banks weren’t worried about going out of business, they just wanted higher profits), the conservative nanny state stepped in to bail them out with the 2005 bankruptcy law, using the force of the government to squeeze every last cent from debtors. Under the new bankruptcy laws, the government will monitor debtors for many years after they have declared bankruptcy, seizing assets or garnishing wages for debts that may have been incurred 20 or 30 years in the past. This might sound like a tall order, but when big banks are troubled, the nanny state is there to help.

The fact that the new bankruptcy laws were actually increasing the role of the government in the economy was largely missing from the debate. Historically, most loans required little involvement from the government because they were attached to physical property such as land, a house, or a car. If a debtor had fallen behind on his payments, then the role of the court in the debt collection process was essentially a one-time proposition: the court would simply require the debtor to turn over ownership of the relevant asset to the creditor, and the case would be over. The provisions of the new bankruptcy laws essentially mean that the courts could be following a debtor for the rest of his life, if he has not paid off his debts.

2 This data is taken from the Federal Reserve Board’s Consumer Credit series, which is available on its website. (Nominal stocks of debt were deflated with the CPI-URS).
However, in the last two decades there has been an explosion of debt, mostly credit card debt, that is not secured by a physical asset. At the beginning of 1980, the outstanding value of “revolving credit” (a category that is mostly composed of credit card debt) was just over $120 billion. By the beginning of 2006, revolving credit had grown to more than $800 billion (both numbers in 2006 dollars).2 The growth of this form of credit is not necessarily a bad thing. Many people find themselves in need of loans to get through hard times or to make important purchases before they earn the money to pay for them. But, the mere fact that this form of debt grew so rapidly shows that the risk of default on these loans was not a serious obstacle to credit card lending or other forms of unattached loans. Tens of millions of people were having no trouble getting access to loans through credit cards or other types of credit.

3 There have been several papers examining the weak link between credit card interest rates and other interest rates in the economy. The research suggests that banks tend not to pass on lower costs of funds in the form of lower interest rates to borrowers because they do not want to compete directly on the basis of low interest rates. The reason is that the people who select credit cards primarily based on the interest rates they charge are the ones who are most likely to default, and therefore are not customers that the credit card issuers really want (see Calem and Mester, 1995). Insofar as this explanation is correct, consumers are likely to see little benefit in the form of lower interest rates, even if the new bankruptcy law succeeds in substantially reducing default rates.
There is an argument that consumers will benefit if the risk of default on credit cards and other debt is made lower as the result of tighter bankruptcy laws. In principle, lower default rates should lead to lower interest rates for borrowers, since credit card companies have to charge an interest rate high enough to offset the losses from loans that are never paid off. The extent to which borrowers will ever see a bankruptcy dividend in the form of lower interest rates is questionable, but even if increased debt collection does lead to lower credit card interest rates, there are still costs associated with the increased role for the government under the new bankruptcy law.3

The effect of the government’s increased role in debt collection is largely the same as the effect of an increase in taxes. If workers know that a large portion of their wages, for example, 15 percent, will be pulled out of their paychecks and sent to their creditors, then it has the same effect on their incentive to work as if the government were pulling another 15 percentage points out of their paycheck in taxes. The nanny state conservatives know very well how much economic harm is done by high taxes. The same amount of harm is done when the “tax” is a payment to creditors from the distant past. The result is that workers will have less incentive to work because they keep a smaller chunk of their paycheck.

Perhaps more importantly, since few people really have the option of not working, workers with large debt burdens will have more incentive to work off the books, doing odd jobs or earning income in other ways that is not being reported to the government. In other contexts, conservatives have viewed this as a bad outcome.

As a practical matter, the enhanced debt collection structure put in place through the bankruptcy reform bill passed in 2005 is likely to have other undesirable consequences, the most important of which might be reduced child support collection. In principle, child support payments still have priority over repayment of debts, so that creditors can only get repayment from money left over after all child support has been paid. However, money cannot be strictly separated in this way. If debt repayments prevent a non-custodial father from ever accumulating money in a bank account, and the father loses his job, then the child support payments will stop as soon as the paychecks stop.

Similarly, if this father decides to work off the books in order to evade debt repayment, it will be much harder for the government to track his income in order to force him to make child support payments. We will only know how much of an impact the bankruptcy law has on child support payments in a few years, but protecting the flow of child support does not appear to have been a major consideration in the design of the bill.

There is another important weakness in the logic behind the bankruptcy reform bill — there is no rationale for making it apply to debts already incurred. If we believe that consumers will benefit from lower interest rates on loans because the new bankruptcy bill lowers the risk of default, then this is a reasonable argument for the new bankruptcy law, even if it means a stronger role for the government in the economy. But the reduction in default risk can only change the interest rate on loans that consumers take out in the future. Banks and credit companies are not going to reduce the interest rate on loans they have already issued because the tougher bankruptcy law means that the default rate on these loans will be lower than under the old law. Any reduction in the default rate in prior loans is pure profit for the credit card industry and other creditors.

In effect, the conservative nanny state has rewritten the terms of these loans after the fact in a way that benefits creditors. Borrowers took out loans under one set of bankruptcy rules. The lenders also willingly made these loans under the old bankruptcy rules. Presumably, the lenders understood the risk of default that was implied given the bankruptcy law in place at the time. Then the financial industry got the nanny state to change the rules in a way that not only applied to future loans, but also to the ones that were already issued. (The law could have been written to only apply to debts incurred after its date of passage, with the old bankruptcy rules continuing to apply to pre-existing debt.) In this way, the nanny state gave a huge gift to the financial industry at the expense of debtors.

However, it would be wrong to say that the conservative nanny state is always hostile to debtors. The new bankruptcy law included a provision that allowed three states (Florida, Kansas, and Texas) to retain a homestead exemption in their state bankruptcy laws. This exemption allows a person who goes bankrupt to shield as much money as they want from creditors in the form of equity in their homes. In some cases, the amount that is protected could run into millions of dollars.

This could mean, for example, that if a contractor did $100,000 of repair work on the home of a Hollywood actor, and the actor chose to declare bankruptcy rather than pay the bill, the contractor would simply be out of luck. This would be the case even if the actor’s home was worth $10 million. By contrast, if a renter owed a hospital $100,000 for an operation, she would not be able to shield even $10,000 in a bank account. Obviously, the conservative nanny state likes homeowners and doesn’t like renters. It will protect you from your creditors if you decide to buy a house, and it will help your creditors hound you to your grave if you rent.

Answer 2

It's amazing that people are still blaming people... we are taught early on that owning your own home is where it's at.. "why rent when anybody can get a morgtage" was the buzz phrase everywhere 2-3 years ago.. bottom line, deregulation allowed this to take place, people who are already on the bottom end of our economic ladder are more vulnerable to scams, and the non fixed rate Home Loan scam was obvious to everyone of the lenders that made millions off of it for the last 6 years... Just Like Renta Center's and Aarons sell sub par crap for 300% profit.. people with poor credit are easy marks.. and once again in our Darwinian capitalist filth system, the little guy is to blame for being the little guy... WTF?

Answer 3

Here is the problem. The majority of people that have problems with their mortgage are not investors that got caught with their pants down but average (usually poor) families that got bamboozled into taking ARMs. I actually blame greedy lenders more. Remember, they get paid if that loan gets approved. Whether or not they default has nothing with the brokers getting paid.

To be truthful, Bush's plan will help only a fraction of the people that are in trouble. The plan is really a dog and pony show to inspire confidence in investors.

(PS) I knew the good times were coming to an end about 2 years ago when I flipped my last house and (luckily) only broke even.

Answer 4

I think the home owners should have be held responsible. But if we have as many for-closers as they say we Will\ it will drive down the neighborhoods home worth. i would not like foreclosures on my street.I would loose allot of money selling mine.

The people who bought theses homes should not be able to buy another for 20 years. They have to have some consequences.

Where was the help when the oil bottomed out in the late 80s? I can tell you.They could not find a job and lost their home. Those homes sold for next to nothing by rich people and then resold 3 or 4 years later at a tremendous money making scams i have ever seen for myself.

I am not for the bailout for these stupid people but then again i do not want to see the average homeowner suffer because the houses go into foreclosures.

Answer 5

Perhaps ethically, he shouldn't bail out the lenders. (Let's face it, there is no "bail out" to the borrowers.) However, the lack of regulation regarding investment vehicles and "packages" based on mortgages led to nearly every single financial institution in the country passing one block of bad mortgage backed securities down to each other all down the line; all to "regift" them to someone else.

At this point, we don't know how far that bad debt goes and how much of other financial institutions' assets (meaning, really, OURS) are entangled in these garbage funds. Income can't come back to mortgage lending unless home buying resumes. Home buying won't resume without a massive price correction. I saw one dude on CNBC toss out the "insignificant" figure of 20-30% national AVERAGE price correction for income to return to this sector. Guffaw!

That kind of price correction just ain't happening in a quarter (like this guy said it would). Not with every second homeowner and his sister having held onto the expectation of 400% return being his/her "due".

So, it seems that income will NOT be returning to mortgage lending for a while. When major financial institutions are writing off billions in a quarter, a bail out like this is probably more a band-aid than a cure, but perhaps a desperately needed band-aid by this time.

Yes, it should never have grown that bad. But it did. Now what? Which may be worse at this point? A partial bail-out or the risk more markets collapsing under the pull of losses or speculative fears doing the dirty work for the bad debt?

Answer 6

Can't dispute this. When you're right, Chi Guy, you're right. . .

When my husband and I purchased our first home, we didn't go out and get a loan for more than we could afford. Why anyone would do that is beyond me. But I guess greed is alive and well and living in the US.

I think that the idiots that are falling due to this deserve to fall - the loan companies that didn't care if the applicants could pay the loan back when the low indiductory rate was up, as well as the idiots that took the loans not thinking about if they were going to be able to really pay for a loan that was well beyond their means. There are going to be companies that close, and individuals that end up in bankrupcy. That is what happens when one lives beyond their means and doesn't think about their money or the future.

Chalk it up to a lesson learned. . .

Answer 7

Many of us think that he shouldn't.

The market was already beginning to come up with it's own response to the crisis. The CEO of Merryl Lynch was canned, and Citicorp was bailed out by an investor from Abu Dhabi. Ditech.com was marketing it's own loans, called "fix your ARM".

The people who should foot the bill are the idiots who thought they could buy a house and ignore the fine print, and the idiot banks who made such risky investments.

A bail-out only encourages the banks to do it again.

Answer 8

First, who is the "they" you refer to? Is there a source you can include?

Second, what "bail out" are you talking about?

If you're talking about the rate freeze, you need to keep in mind that it's VOLUNTARY -- mortgage companies and investors are not required to participate; and, not all borrowers are going to be eligible. For instance:

The rate freeze will be available only for adjustable rate loans made between January 2005 and July 30, 2007 with rates that are scheduled to rise between Jan. 1, 2008 and July 31, 2010.

http://apnews.myway.com/article/20071206/D8TBKLOG0.html

Other conditions will apply as well:

"The freeze will be available only to homeowners who have not fallen behind on their payments at the lower introductory rates and who are living in the homes. This requirement would exclude people who bought investment properties hoping to profit from the housing boom.

Also excluded are people who can afford the higher payments. The administration expects these people will move as soon as they can to refinance to more affordable fixed-rate loans. "

http://news.yahoo.com/s/ap/20071206/ap_on_bi_ge/mortgage_crisis

So, if someone bought a home as an "INVESTMENT" to "FLIP" and they "AREN'T LIVING IN THE HOME", they won't qualify for the VOLUNTARY rate freeze that the mortgage company/investor may or may not agree to offer.

If someone has fallen behind in their payments, they will be excluded from the VOLUNTARY rate freeze that the mortgage companies/investors may or may not agree to offer.

If someone has already lost their home through foreclosure, they will receive no benefit from the VOLUNTARY rate freeze that the mortgage companies/investors may or may not agree to offer.

And, people can also be excluded from the VOLUNTARY rate freeze that the mortgage company/investor may or may not offer 'IF THEY CAN AFFORD THE HIGHER PAYMENT".

Do I agree with the "rate freeze"? No, but not because I think its a bail out -- it's just another example of George W. Bush making "empty" gestures that rip this country apart. It's been less than a week since this VOLUNTARY program was announced and we already have the anti-bail out people up in arms. How long do you think it will take before we have the people on the other side of the issue angry because the program turns out be another one of George Bush's "smoke and mirror" moments?

Here's something else for you to think about. Mortgage companies and investors already have the ability to FREEZE an introductory rate if they want to -- they can also choose to work with borrowers to convert ARMS to fixed-rate mortgages.

Answer 9

No and your right. This supposedly is a capitalist country. Be one. It letting the marketplace correct what needs to be corrected. You have to learn to be financially responsible and that applies to both the mortgagor and mortgagee.

Answer 10

Wow that was a long answer. I didn't read it. lol
I think no bail out. Now that they lose money they cry, when they win you hear nothing but bragging. Thats how the world of business turns. I lost money in stocks, anyone care to bail me out.......i guessed so. :-(

Answer 11

He shouldn't. It's why government doesn't work - it invariably rewards and bails out the wrong behavior.

What about those of us who have paid our mortgages dutifully and bought houses within our means?