I'm increasingly appalled by where the dollars in the 700 billion dollar bailout appear to be going. This is my best recollection of what I said in a letter to my state representatives in Congress. Not sure if it was heard then. I certainly hope, with the auto bailout vote looming, that lots of people have written of their displeasure.
Dear____________:
I ask, as a responsible homeowner, that you do not follow in the footsteps of Democratic senators and endorse additional bailout of the sub prime mess with tax dollars. As I write this, you are being asked to support using part of the seven hundred billion dollar federal bailout, which so far appears to be in excess of the entire cost of World War II (adjusted for inflation), to subsidize poor business decisions, deliberate risk taking and greed. Subsidize it with MY tax dollars.
The proposal to, among other things, bail out people in foreclosure, many of whom were sub prime borrowers, may seem humane on the surface, but it's wrong. And those begging for the bailout are saying we should do it for reasons like this:
KEITH ERNST(D) - Senior Policy Adviser - Center for Responsible Lending : "These are families who, in many instances, this house is their primary asset. It’s how they’re holding their wealth. It’s their nest egg for retirement. And those homes are a just tremendous jeopardy right now, and largely this is because of the shoddy underwriting that’s taken place in the sub prime market in recent years and these so-called mortgage resets, where a borrower’s interest rate could go from 8% to as high as 12% just two years into their mortgage. And this results in a payment increase of 30% to 40% on their mortgage."
You don't need a degree in economics to see the lunacy in this statement. He goes on to state that "1.4 million of these threatened sub prime homes are the owner's FIRST home purchase". Then he stated we should bail them out as it's their "primary asset". Most of those people bought those new homes with NO down payment. With no down payment and no principal being paid, they have no assets. They are paying the equivalent of rent for a home in which they have no equity. Even if the home is refinanced through this plan, it would be, in most markets, worth tens of thousands of dollars less than they owe on it. For a house to be a "primary asset", don't you have to have equity in it, or a reasonable chance to build some? The sentiment is humane, but the reasoning is flawed.
Certainly one would wish to help people who bought wisely, now in foreclosure due to their jobs being lost. But I ask that do not use my tax dollars to bail out greed and avarice, either in housing markets or banking and other industries that perpetuated their own situation with their own avowed practices.
Let's give an example. For this I quote higher incomes, ones that some elected officials term "rich", if one is single. They are used for example only, $100,00 being easy to do the math on. Yet, cut the income quoted and home prices purchased in half, or by two-thirds, and the example remains true.
A person with an income of $100,000, whom I will call Brenda Doe, bought a smaller, older 3 bedroom, two bath home, priced at much less than the areas average house cost of $200,000. She put more than 15% down and financed the remainder at an interest rate of 6.4 percent with her good credit, with a fixed rate loan. Her monthly payment, including escrow for property tax and insurance, is around $1500 a month. That is about 30 percent of her take home pay after retirement contributions, leaving enough for repairs, food, transportation, small emergencies and student loans. This is her first home, bought after saving for years while living in a small apartment.
Then there is Mary Doe, who is older, single with no children, and has an income of $100,000 as well. Mary went from her rental condo that she could afford, and opted for an opulent, five bedroom, four bath, 3,500 square foot, $400,000 McMansion in the same geographic area as Brenda Doe. Mary put just 5% down and financed the rest with a 2/28 ARM. This loan allowed her to pay a low (for her less than great credit score, she admitted) interest rate during the two year introductory period. After that, the full amount of the loan would be recalculated over the remaining 28 years with a new rate.
Her initial low interest, first two year rate of 7%, with a property tax of 1.25 percent and a PMI of .5, resulted in house payment of $3244. That's almost 60% of her take home pay. But Mary hoped (I prefer the word gambled) that the market would boom along with her home value, that she indeed she would get the promotion and raise that had been hinted at, or even that she'd get married and have someone to share the expense in that two years. Of course, that adjustable rate mortgage "adjusted" (hence the name) in two years and also had a balloon payment attached,wherein when the remainder of the loan is due after the introductory period in one lump sum.
Mary planned on refinancing at this point, but that didn't quite work out. By living in a house she couldn't afford on one income and using her credit cards to buy necessary items, with the house debt on the books as well, her credit score diminished greatly. Mary was still single and her promotion never came through as her company cut back and even laid off some folks. With that, and other market factors, financing wasn't an option. At the end of the two years, her interest rate jumped to 11% and her monthly interest payment to $4392 and she went into foreclosure. Homes in Brenda Doe's neighborhood are selling, slowly, and at a loss for the owner. But they are selling, as they are still in reach for people coming into the area with equity to get financing. Homes in Mary's neighborhood are sitting vacant in large numbers.
Luckily for Mary, the government, with your vote as our elected official, is proposing stepping in and providing billions of taxpayer dollars to restructure her loan, such as getting her lender to reduce her interest rate to 3% for five years, deferred payment on $100,000 of the balance and extending the length of the loan to 40 years, all with the help of one of the new, government-backed rescue programs which will help her and protect some of the losses of the predatory lenders. That will reduce her monthly mortgage bill. with taxes. to $1,511, about what Brenda Doe is still paying for an older, much, much smaller home in the same area.
Mary will essentially be able to hang on to her palatial home with the help of Brenda's and others tax dollars. As important as some of you may say that it is to the larger economy, it's hard to argue that it's fair, or even smart.
Yes, some borrowers were taken advantage of by predator lenders; good people trying to get ahead and provide for their families. Some bought homes they could afford and then lost jobs or had divorce, death, or serious illness of a family member enter their life. For those individuals, I would wish that there was some help. Extending unemployment benefits is one step. Bringing back tech and manufacturing jobs shipped overseas would also make more of a difference than giving an out of work stockbroker or IT specialist a shovel and pointing him or her at a road that needs repair.
I have been unemployed, more than once, due to corporate bankruptcy. I've been there and I had to sell my house or downsize and rent a smaller place. But I never expected the government to bail me out. Nor do I wish the government to bail anyone else out with our money. Yes . . . . ours . For it's not the government's money, it's ours, the American taxpayers. It should not go to bail out poor decision making, gambling on the market or greed. Publilius Syrun, a Roman author of 1st century, BC said it better than I -"Poverty wants much; but avarice, everything”
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No one bailed out those who bought tech stock in the late 90's. No one bailed out the gambler who took the money he needed for next months bills and went to Vegas and promptly lost it. People take risks with their money. Some turn a tidy profit, many more lose their shirts. Bailing them out to the tune of billions of dollars of taxpayer money is not the answer.
The best way to have market based corrections to our housing market is to allow those who made poor decisions on either end to take their losses and let the market recover, thus sending a message to corporate America. A message that says "get greedy or provide less than competitive services, and we will NOT bail you out". The housing bubble was bad. My home has lost a great deal of value, and thus the equity I worked so hard to save for, is gone. But one sure way to ensure bubble after bubble, be it real estate, insurance, cars, or other industry, is to institutionalize what someone at the Wall Street Journal wisely called "the one way bet".
It's not just about the economy. It's about greed. It's about living beyond our means, both as individuals and as a nation. This living beyond our means has been made possible by borrowing money we don't have, reducing current and future generations disposable incomes to heal something that has no immediate monetary band-aid. Heal it with resultant millions that will be unaccounted for, ending up in the personal pockets of those people who structured the problem in the first place.
Taking needed disposable income from working tax-paying American is simply throwing hard earned money at the very people and companies who should get as little as possible, thus structurally incorporating moral hazard to the long term economic debacle.
I'm not an economist. I'm not versed in banking or financing or real estate. What I AM is a taxpayer, who worked inordinately hard in school and life to get what little I possess, both in assets and earning power. I gained it through competitive hard work and honesty. As a taxpayer, the only economic stimulus that I would ask of you to uphold, as my elected representative, is to let the economy remain one of conscientious capitalism.
Sincerely,
Dr. BD.
GLAZED HAM DINNER - For Christmas - or just some of your favorite people.
To accompany the meat, fresh green beans, and homemade cornbread stuffing baked in a casserole, full of sage and caramelized onions and yeast rolls. And of course garlic mashed potatoes. While the potatoes are cooking I'll check the temperature of the ham and baste it with more orange sauce.
The table is set. The wine is poured.
