Tuesday, December 9, 2008

A Letter to my Representative

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.


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
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.

Dr. BD.


  1. Well said and I agree completely.

    All The Best,
    Frank W. James

  2. I agree with the sentiment, but think you might want to get it proof read first.

    Normally your writng is awesome, this looks like a first draft don off the cuff. Sorry to be a curmudgeon.

  3. "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."

    Or as DH likes to say, our economy in recent years has been based on people buying crap they don't need with money they don't have.

  4. Very good letter. My wife and I are in the same spot as Brenda. We bought our home for $100K, putting 20% down and a 6% fixed-rate mortgage. I've been fortunate and have only been laid off once, last year. I was out of work on severance for about four months and am now making about 10% less than before the lay-off.

    That said, when I was laid off, we still managed to pay off enough of the mortgage to half the original loan. If necessary, we could pay it off, but that'd mean dipping a bit into the 401K. I'm old enough that I can withdraw from the 401K without penalty.

    I deeply resent having my tax dollars support those who had no business getting a mortgage. Subsidizing those who can not qualify for a loan is height of idiocy. They have no incentive to continue making payments if they know they will get bailed out.

    I wonder how often that scenario will repeat itself?

  5. All I can say is that I am immensely proud of my Rep (Jeff Flake) for voting against the bailout not once but twice.

  6. I agree; I fear that the money will never be paid back we are already on the receipt list for our Social Security. No more bonuses to these greedy people running these companies into the ground. Let the CEO get hung out to dry. Fire them for being a bad leader. Last I heard in our economy the goal for large companies is to make a profit for the stockholders. Don't be against stockholders - our 401K plans contain stocks.

    I blame our government. Just look at Freddie and Sallie and you will see the real criminals.

  7. Did ya happen to catch the story on Merrills CEO wanting $10 million bonus. God what gall!

  8. Nicely thought out and written.

    I view the problem as far bigger then anyone seems to grasp. We are leveraging our future as a country on the greed of the wall street types and poor managers.

    We are now talking trillions of dollars. This will take generations to pay off with taxes or we can just devalue the dollar and pay it off with hyperinflation.

    Regardless this bailout has got to stop and we need to stop paying out the money.

  9. The flaw is in assuming that the congress-critter has the attention span necessary to get thru the whole text.

    I'm not betting in your favor.

  10. Everyday I feel more as if we are living in Bizarro World. I don't fear our current economy as much as the response to it. I worry we have now passed the point-of-no-return that any form of democracy offers its citizens when morality or personal responsibility has been systematically erased for gain. And our own greed for MORE and buying what is sold has brought us here. Sadly, it takes greater crises than these to return to balance. G-d help us.

  11. Unfortunately, the Congresscritturs sole purpose (as far as I can tell) is to do whatever it takes to get reelected. As long as people think that someone else will be made to pay for their poor choices, they will continue to vote for whoever offers them the most "free" stuff. BTW My idea of a perfect house is <1000sf with a 3000sf shop. (With a built in range, of course!)

  12. The solution to the financial crisis is simple. It's just not easy.

    The solution is, as you say, to let people abide by the consequences of their actions. No one made these folks buy a house they couldn't afford, just as no one made the big banks make huge speculative bets on derivatives. And, no one told the UAW that come what may their contracts would be covered (and told GM that come what may they'd be covered for their bad decisions).

    Let these folks fail! GM and Chrysler hitting Chapter 11 would be the best thing for them. They could get out from the vampiric union contracts, and start again with reasonable labor. After all, if they could pay $35/hour instead of $72/hour, they could employ twice as many people for the same amount of money.

    Same thing for houses... let the bad mortgages fail! Yes, housing prices will go down, but that's a good thing. The responsible folks who have been saving their money will now be able to buy a house, and those of us who have lots of equity in houses we bought years ago will have more of an incentive to trade up.

    America is supposed to be about equality of opportunity, not equality of outcome.

    Oh... and how about the federal government IMMEDIATELY stop spending a penny more than the income tax revenue, so we don't get any more upside down? I get a lot more upset about the average Congressman/Senator making almost 200 large ones... when they've run the country into the ground.

  13. Bravo!!! the mushroom

  14. Dead on the money Brigid! Thanks for saying it much better than I can... I just get too pissed and the language goes down hill by about paragraph two.

  15. This is almost a systematic attack on the traditional middle class. Our investments in the market are gone. Our cash will be next, as the inevitable rampant inflation follows the injection of money into the system. Our taxes are being used to subsidize failure both personal, corporate and Governmental. And quite frankly people, the powers that be do not give a damn. We have a new aristocracy, and they have seen their power emanates from their ability to dole out money .

  16. Excellent, Brigid, excellent!

    Right to the point, readable and understandable. Wait, there might be an exception to someone somewhere in government.....that'd scratch their punkin head and say "Huh"?

    Whats for your fee for typing common sense letters like this anyway?

  17. We've lost a similar amount of money on property we bought last year to escape our homeowner association hell here in FL -- my big homebuying mistake.

    Me: "Gee, the deed restrictions look reasonable, and I doubt that they'll change much."

    We've learned otherwise.

    I think it was hard not to lose money buying anything in the last five years. I don't doubt that the "Home on the Range" house was bought with a sensible plan.

    I'd love to downsize with the new house, but Mrs. Roscoe isn't yet on the same page. Rather than argue about the situation, I've set the price/payment limits based on what we can realistically qualify for, and I'm leaving it up to her and the builder to come up with something that meets the budget.

  18. BTW, Mrs. Roscoe is a physician. We know something about six figure student loan debt. :)

  19. Three words are the root cause of the situation :

    Communities Reinvestment Act

    When the politicians indulge in social engineering (and I would be interested in hearing from anyone who categorises it differently), forcing businesses to behave in ways contrary to common sense and good business practices, then (to quote a very quotable quote) when the eco-friendly fertilizer hits the rotating, oscillating, vector-flow cooling unit, this is the result.

    Anyone who takes out a mortgage on the basis of "reliable, steady income" from welfare payments is certifiably deluded.


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