can someone explain to me why it's the government's responsibility to bail out borrowers who were told . . . .

Question

. . . .about ARMs and how they function? i keep hearing in the news how the government is supposed to step in and stop these ARMs from adjusting upward and freeze rates where they are still in their introductory phase, but WHY?

when you sign on to an ARM, you are told how the instrument works. you are given a CLEAR explanation of what it is. i have to say: i think it's irresponsibility on the part of the borrower; not the lender.

i DID start this question with 'can anyone expain to me' and i mean it. i'm NOT a finance expert or someone even in the business world. and before someone starts accusing me of being 'upper class and cold,' i guarantee that 98% of the people reading this question earn more money than i do. I'm a school teacher and musician, so i'm just above the poverty level. but i was very careful when choosing my mortgage and buying my home. is there really more to this than what i'm seeing? explain...please.

Answer 1

It's not their responsibility to help these people. It's their responsibility to keep the economy going and if too many people foreclose, we'll go into a recession. That's a simplistic explanation, but to to the point.

Answer 2

The government doesn't really want to get involved. They don't want to rescue people who made bad choices. They want to keep the economy growing so that we re-elect them next fall.

The credit markets are a mess right now, primarily because of the sub-prime loans and the rash of foreclosures. Banks have tightened credit standards (closing the barn door after the horse left) and the general flow of money has really ground to a halt. Banks that have big losses in mortgages are also slowing credit to businesses, etc. This is the money the government really wants to flow again.

The government would like to slow the cleansing of these bad debts so that that economy can digest it over a few years instead of all in late 2007 and early 2008. The worry is the credit malaise would spread to other sectors and really drag down the economy.

Note no comments about how people got into the situation in the first place as I believe in personal responsibility, but I do worry about the economy as a whole!

Hope that helped!

Answer 3

It depends upon who you ask. The borrowers in dire straights are quick to blame the lenders and mortgage brokers for "scamming" them but 95% of the time everything was explained correctly and if not it was clearly stated in their closing documents which they chose not to read before signing. It amazes me how many tried to achieve the "american dream" with their "eyes wide shut". Still, it is not uncommon for the federal government to step in at a time of crisis to help provide some relief too deserving victims, while the bush administration is not known for their quick response to any crisis within the borders of the US, their efforts to freeze the adjustable rates couldn't have been accomplished without the help of the lenders involved who were motivated by the fact that foreclosure often results in bigger losses than overlooking an interest point or two. Plus the economic reprecussions of the huge rise in foreclosures certainly doesn't aid the economy which afftects the rest of us not at risk of losing our homes. Another example of when the government stepped in was back in the 80's when they bailed out Chrysler from bankruptcy.

Answer 4

From everything that I read, the government is only encouraging the banks to freeze interest rate hikes. Thus far, they have forced any changes.

The problem, like many, has two sides. I really don't feel a lot of sympathy for people who are intelligent enough to make major purchases, but incapable of reading the details of a mortgage. Similarly, I feel no sympathy for people that take all kinds of credit cards and run up balances, without having the means for paying for the purchases. I make exceptions for those people struck by medical or employment problems.

On the other hand, banks and lending institutions have the fiduciary responsibility to their members and shareholders to make credit worthy loans. Many institutions failed at that responsibility. They convinced many individuals that they could afford a lot more house than they really could.

Naturally, the banks were interested in profits. They are for-profit businesses, so they should be. And despite a previous response, they have very rarely have anything to gain from repossessing houses. It costs the bank a lot in legal fees and time. They would rather have their debts paid.

Answer 5

The simple answer is "Politics." In fact, many borrowers had no idea what they wer getting into. Some were told lies, and some lenders have paid huge fines for misleading borrowers. Many others just figured that the housing book could go on forever and decided to risk it.

The problem does not hit only individuals. Banks and mortgage companies bundled these low quality debts into securities that they sold to institutions. Now the economy is faced with a flood of foreclosures which can lead to a serious recession. Governments try to forestall this by bailing out the victims. In other words, they want to transfer the results of bad decisions onto the people who made good decisions. that's called politics.

Answer 6

The government isn't bailing out anyone. An agreement was hammered out between Treasury Secretary Henry Paulson and the major lenders to get the lenders to agree to keep those rates frozen for up to five years, in an attempt to curb the huge number of looming foreclosures.

Agreed that the borrowers made some stupid choices in taking some of those ARM's, but the issue here is keeping the economy from slipping into a recession. The real estate market is already flooded with properties for sale, driving down the values of real estate for others. While these ARM holders are getting a break here, the real intent is to simply stem the horrible real estate values drop.

Answer 7

I would caution you from believing that EVERYONE that took out ARM's were fully aware of what they were doing.

I am personally working with a lady right now, who was told by her loan officer that she was getting a fixed rate mortgage and it turned out she got an FHA 2-1 buydown and the court stepped in and stopped her foreclosure...because she is illiterate and therefore was heavily relying on what she was verbally told by the LO.

The forms are extremely complicated, and years ago when I worked wholesale lending, where brokers were your customer...it would SHOCK YOU, how MAJOR companies will support a degree of loan fraud, where things are changed at the borrower MINUTES before closing, and they never know the difference.

People were told, by supposeded experts, that the "rates won't go way up" "your payment won't change that much" "it will only increase by 40 bucks or so...you can swing that, right?".

I heard it for years...so yeah, I truly believe that a massive number of people didn't fully understand just how much their payments could change, or that the LO can NEVER predict what will happen with the rates, their chances of refinance etc. I have seen LO's promise people that if they come back, they can refinance them at no cost...which I have never seen a bank do. Some of those customers really relied on that information.

IF IT TAKES AN ATTORNEY to read and understand those forms, because they are written in extremely complicated, legal language....the then the AVERAGE CITIZEN cannot be expected to understand at the same level.


I blame the GOV'T for not passing laws for reducing the amount of paperwork and making the process more clear cut. It IS the responsibility of the lender to make sure the customer understands what they are signing, and make sure they are explaining it correctly.

If you are a school teacher and a musician, then you have absolutely no idea of what goes on behind lending doors on daily basis, or what people are told that would make your blood freeze.

Ask yourself this: Did you REALLY get a good deal on your mortgage? Or do you just think you did? Did you REALLY understand what you were signing? Or were you LUCKY enough to get somone honest and ethical to explain it to you?

I had the VICE PRESIDENT (when I purchased my first home before I worked in the mortgage industry) of a Bank of America Branch Mortgage Division....to tell me that if I shopped around for a mortgage, that BOA would think I wasn't serious about getting a loan, and therefore would deny me. At the time I had no idea of what it took to qualify for one. So I stopped shopping and got ripped off...never happend again.

By the way, that same VP? She was eventually fired and opened up her own brokerage, and eventually lost her brokerage and her LO license.

The lesson: Don't assume that just b/c you go to a major bank, that you are safe there either.

PS: Serge made a great point above. Yes, these lenders are paying heavy fines, but if you have to pay a couple of million in fines but you have profited BILLIONS...what is your incentive to stop committing fraud? There isn't! It becomes the cost of doing business.

Answer 8

I am not in favor of bailing anyone out, but I am in favor of any programs that will assist in stopping the bleeding of everyones equity and financial loses due to this. We are all to blame, we all wanted our properties to be worth more. We pushed, and the lenders obliged. Unfortunately, alot of folks who had poor money skills, were caught up in this when they shouldn't have been approved. And now this mess impacts from the lenders down to normal everyday homeowers like you and me. I know my homes value has decreased over $35,000 in one year. If I had to sell now, I wouldn't be able to buy another home due to the new restrictions on loans. I'm a Realtor - no cash flow, no loan. So I don't know where this will end up, but next year isn't looking too good either.

I'm for a freeze on rates, while the lenders take a look at the programs each homeowner is on to see of they can save the loan and help the homeowner save their home.

Answer 9

I can't stand this either. What makes it worse is that my fiance and I live in a state with rediculous housing costs. We're both first time home buyers and we can't even afford to buy our first house because we missed the "real estate boom" and got locked out of the market because of it. We both make decent pay and have jobs. Then you have these morons who buy a $450k house with no money down on an ARM, and are getting bailed out by the Fed. Go figure.

How about this instead- help out the people who deserve to be helped. The people who were responsible enough to realize they cannot afford to have a $3,000/month mortgage, like my fiance and I, and LOWER THE FIRST TIME HOME BUYERS MORTGAGE APR TO 2.5%/YR. Even after the first time homebuyers program, they only lowered the rate by about .20%. This barely makes anything at all affordable. God forbid anybody in office actually help out people who aren't dimwits..This is going on in places like Massachusetts, New York, New Jersey, and California to name a few. It's sad, really. I'm not looking for a handout, that's the last thing I want. All I'm looking for is some sanity. We're not spending $350k for a "handyman special" that needs a total rehab. If only the Fed would help the people who really DESERVE help.

Answer 10

Alot of people who took advantage of ARMs didn't understand the risks involved and were mislead by creditor's. Honesty I think the financial institutions offered them simply because they could take the homes away when people couldn't afford them any longer. The market downturn didn't help either and is the real reason the govt stepped in. With the higher interest rates millions of home owners need to sell property they can't afford, but their are no willing buyers. The good news is that the govt. isn't spending much to bail out citizens who's only other choice is bankruptcy. The financial institutions have agreed to freeze rates at a fairly low place.

Answer 11

So far there is no "government bailout," only a voluntary limited program for lenders that does not involve taxpayer funds. Of course, that may change with an election year coming and the Bolsheviks (Democrats) in control of Congress.