Sunday, February 17, 2008

Why the housing bailout will backfire

The government is starting to get desperate as they realize that we are headed towards a historic banking breakdown and housing great depression.

The politicians don't care about you losing your house. They know you will just rent and apartment and go on about your life happily. Of course it's an election year so you will hear all sorts of "I feel your pain" comments meant to garner votes and express pseudo sympathy for the common man losing "the American dream" but the reality is that is just an ulterior motive and they can really care less.

Don't get me wrong, they do want to keep you in your home, but not for the reason they want you to think.

The banking industry is totally screwed. They made so many bad mortgages and are going to lose so many billions of dollars with the coming wave of subprime arms resetting this summer, and the second wave of option arms resetting in 2010 and 2011 that they know a historic calamity is just around the corner... This is so bad that huge banks like Citibank, Chase, Wells Fargo, Bank of America could very well not be around five years from now if they do not keep people in their homes, and everyone in DC, Wall Street, and the people who read all the housing blogs know it.

Unfortunately most people on main street who only get their news from CNN and Fox really have no idea whats coming.

So the senate, secretary Paulson, and the banks are concocting a scheme to renegotiate, freeze, and lower interest rates for people who can't make the payment. This is the bailout that is meant to stave off the second great depression and save the US banking system.

Here is the problem... I don't mean to sound like a broken record for those who have read my past rants, but it all comes down to moral hazard.

  • I put 20% down on my house
  • I got a 30 year fixed mortgage at 6.5% in 1-2006
  • I had a job
  • I had a credit score over 750
  • I bought a house with a payment I could afford and have not been late yet.
I basically did the responsible thing and I am going to get screwed. I could have got a 2 or 3 year arm at 5.0% interest and would have been paying much less money this whole time. I could then call my bank, claim hardship that I would not be able to pay my rate after it reset, and stayed locked in at 5.0% for the next few years.

Being irresponsible would have saved me thousands of dollars paying a lower rate for the arm and then being able to stay locked in at that low rate thanks to the bailout.

Instead here I am, I did the right thing, and I will be financially punished for it while the person who got their house with a bad credit score, no down payment, and bought more house than they could afford will get to continue happily living in their McMansion for a rate cheaper than mine.

What they government needs to realize is that not only are more people going to be encouraged to do the irresponsible thing in the future since they face no consequences for their stupid decisions but I think this plan will backfire in a way they have not thought of.

What happens when the responsible revolt? What happens when people who did things the right way threaten to walk away if they do not receive the same low interest rate their dumb ass 550 credit score neighbor is? You can read it on the blogs, people are pissed, and I have a strong feeling that our voices will be heard.

Furthermore, why will investors ever invest in mortgages again knowing that banks are going to change the terms of their contract. That is immoral and just plain bad business. This raises new and troubling questions; when burned investors don't buy mortgages anymore and no one can get a loan in the future what will happen to the housing market? Only when this question is answered will we see the true ramifications of this perverse and often baffling bailout.

1 comment:

Anonymous said...

Lots of dung flying downtown Tampa today smell bad for the banks. I went to the Tampa REDC foreclosure sale at the Tampa convention center. It was a joke. In my opinion, these are just markerting plows to move dead inventory not sell homes. In my opinion, these banks are not ready to sell. They want to try and trick people and con people into paying high values or full market price. What happened today proves it. The I want to educate people on was a for sale 4/5/08 and the house which was number 3 on the auction list 5157 Loquat Ct Palm Harbour , FL 34685. Look at the market comps yourself first. Well first they skipped it and auctioned it off as number #5 in the auction order. It was a cash sale. It went up on the auction block and got auctioned for 390k. About 50k higher than market value. A third of the audience beleived it was shill betting and walked out of the auction. Yes a mass exodus. The auctioned begged the people to stay as they were leaving saying it may be auctioned off again later. Well an hour and a half later it was back up for auction like many of the homes. In my opinion, lots of shill bids. If auctionaire doesnt get the price he wants in the shrill bid process it goes up again later the sam day. Scam cheating and lies still beware. Sencond time on auction block 350k. Ya right. I believe that everyone in the same neiborhood can sell similar homes for 350k but magically this ones sells. Make your own judgement.

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