Part 6 – Why homeowners deserve a bailout

By May 20, 2009Economy

Part six of a nine-part series.

Many people insist that taxpayers shouldn’t “bailout” deadbeat homeowners. But the typical argument–that homeowners created the current situation and should take personal responsibility for their own problems–is wrong.

During the housing boom, homeowners, by and large, did what they’ve always done. They spent as much money as they thought they could afford to buy a house. And most of them did that with significant encouragement from President Clinton, President Bush and Alan Greenspan, who went as far as to suggest homeowners should use adjustable-rate mortgages to save tens of thousands of dollars.

At the same time, industry associations spent millions to perpetuate the idea that there was no housing bubble and house prices would only continue to rise.

It should be obvious that banks shouldn’t lend money beyond the borrower’s ability to repay it. That’s why longstanding usury and other predatory lending laws are on the books. The world’s leading economists in financial firms and government should have figured out that lending at levels twice what was supportable by local-area incomes was unsustainable. And they alone should take the blame for their failure to see what was obvious.

To say, in hindsight, that homeowners should have known better is blatantly ridiculous. And the idea that the firms that made these errors, whether they did so through greed or genuine ineptitude, should receive taxpayer-financed bailouts while homeowners are forced to pay for these lenders’ mistakes or face foreclosure will be looked back upon as one of the greatest injustices of our generation.

Taxpayers who saved, lived within their means and didn’t make mistakes have every right to be angry. But its time for them to realize they share the blame, as they are equally responsible for electing the politicians who repealed the protections that would have prevented this crisis.

Now that isn’t to say I think every homebuyer or borrower that got in over their heads deserves a free pass and taxpayer bailout. Quite the contrary. But it is high time we recognize that they were given the rope, and cheered on the whole way, towards hanging themselves.

Next: How to wipe out $4 Trillion in excess mortgage debt

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  • Anonymous says:

    I agree, but it is very hard to stomach when I had the money to put down on a home and my neighbor did not, and now our homes both dropped 40% in value. Now he is upside down big time and i am still staying afloat. If he gets that 40% or more just wiped away, i would feel pretty SICK!!!! But, I dont have a solution to the problem so…. who knows.

    Love the site, you are doing an incredible job!

  • Anonymous says:

    The following post is my opinion and not a statement of fact.

     

    There is no easy answer to this problem. But, at the end of the day, we are ALL paying to keep homeowners in homes they can’t afford. Not only is this at the expense of tax payers, but also to the detriment of new home buyers.

     

    Since when did it become unacceptable to rent a home after once owning a home? If I made bad investment decisions in the stock market, futures market, commodities market, etc., I would have to take the pain without a bailout. Why is the real estate market any different? These people are not being denied housing; they are being denied a house they can’t afford to own.

     

    Personally, I don’t think the government is bailing out the homeowners. Countless homeowners have already lost their homes and if the trend continued, the banks could fail…which brings up a completely separate subject. Should we bail out the banks by bailing out the mortgages they own? Who knows…

  • Anonymous says:

    I agree to both of the previouse postings. I know some people that found that they had lost a lot of money on their home. When they see that they can buy a home much cheaper then the one they own they want it. They can buy a home that is newer bigger and cheap so why would they want to save their home. They WALKED away from their home after taking a second. Bought a new home under their sons name. Why is this ok and why should everyone else pay for them to live better. Keep their boat, and other toys, walk away from their home and not look back.

    Many people are deciding to just walk away. Another co-worker did the same thing. He bought a new house and just walked away from his other responcibility. These are the people that are hurting this entire housing problem, the bad loans, and dead beat buyers.

    Currently I am renting a house from a man that has 4 houses. He stopped paying the morgage almost a year ago and now the house is subject to be sold on 7/03/09. He has been collecting all this money from the three other rentals and pocketing the money and now me and my family have to move. Why is this ok. I stopped paying him a month ago after renting for over two years; now he wants to evict me, how is this ok? I know I will not get any money back from him and I need funds to move. This entire deal with people not being responcible is effecting everyone. They should pay for their poor choices not everyone else. Not the people that are not even home owners, we all  have to pay for their poor choices.

  • Sean says:

    I hear you, but it is interesting to me how you don’t think it is ok for him not to pay the mortgage, while you do think it is ok for you not to pay rent. Your rental agreement with him likely doesn’t give you a free pass just because he stops paying his mortgage, yet you feel justified in doing exactly that. Perhaps he feels justified in not paying his mortgage because the lender told him house prices only go up and now he feels like his life has been ruined by a bunch of rentals he wished he never had…. who knows. But frankly there is no difference – both of you have shirked your responsibility.

     

    In the end we can do all the finger pointing we want, but there is no way to resolve this massive credit and housing bubble in a way that is completely fair. There is zero possibility that everyone is going to sit there and make payments on an excess $4 Trillion in debt – so what is your alternative? Throw them all in debtors prison?

     

    Note that historically debtors prisons have been used as a way to enforce the extraction of rent – essentially forcing people into slaved labor. One of the founding principals of the US was to eliminate this such that people could be free of rentiers, and thus the creation of our bankruptcy laws. Bankruptcy keeps creditors honest as they risk losing their capital if they over in-debt their subjects. Why people think that shouldn’t hold true with mortgages only shows me we need to do a better job of teaching history in this country.

  • Anonymous says:

    I justify it by paying him first and last months rent when I first moved in. I am moving out and being that he has not paid the morgage ( for 1 year now)and the house is being sold in less than a week I feel that this is right. I will never see my deposit so I told him that he can keep the money but that I was not paying him the rent and that we were moving out before the bank kicked us out. He can keep the cash for key ( I feel that is what he is going to do) but I really do not care.

     

    I do not think it was fare that I have paid rent on time every month for over 2 years to find that the house went into foreclosure in Dec. of last year. I have given the owner a chance to try and save the house so I would not have to move but he never came through. I have received a notice on the door, in the mailbox and a certified letter (trust deed sale). So if you think I am doing wrong what would you suggest. I pay the landlord, get kick out with no funds to move and sit on the street with my children. That sound better. It’s all about making sure the landlord has money for himself, boy does that mean I am being selfish because I want my children to have a roof over their held?

     

    The landlord did this to himself because he was being selfish. He took a second on his house and bought two houses in Nov. 2006. Then last year he moved and bought his 4th house (taking another loan out ) which was already out of his means. The house is new over 4,000 sq ft. in a gated commuity with private lakes. He was already having problems paying his other homes and then he decided to buy another house. The 3 homes are just in his name the new home is just in his wifes name. I feel this was all planned out and his renters have been paying for him to live nice and now we are having to face his foreclosures. This is not someone that stepped in to this problem, he created this problem for himself.

     

    This is what I am talking about. People are making this issue worse and not better for anyone. Fine paying rent is an obligation but it was his obligation to pay his morgage so his renters can have a roof over thier head. I have always rented and have never been late or stopped paying.

    One other thing to add is that I do not have a lease agreement. The landlord never renewed the contract so we are screwed with that also. Thank you for your input.

  • Sean says:

    You’ve missed my point. I was not attacking you, nor suggesting I might not have done the same in your shoes. I am only pointing out that it is ridiculous for you to attack him for not fullfilling his obligations, when you aren’t fullfilling yours (you both signed contracts agreeing to do something and you aren’t).

     

    Know that he has justified his actions to himself, just as you have justified your own actions. I frankly don’t care if what either of you did was right or wrong – for me this is not an issue of morality at this point, it is an issue of practicality. We simply don’t have the time or the resources to try to sort out who was right and who was wrong on a case by case basis when we are facing $4 Trillion in excess debt that has left 25% of US homeowners with a mortgage underwater. It’s time to move on and focus on the bigger picture.

  • Anonymous says:

    Comment deleted for using fake email. Folks – I’m willing to debate anything and I typically don’t delete emails of people who disagree. So to this poster, I invite you to repost your disagreement using a real email address… and please keep it short and to the point.

  • Reality Calls says:

    Why do Sean’s, and practically all articles on he housing crisis, fail to mention a crucial fact? Especially the ones in favor of handing Trillions of dollars to “home owners” via debt forgiveness and cramdowns?

    47% to 51%, depending on loan type, were RE-FINANCES, where home owners pulled out money. And often multiple times. They pocketed the money and either spent it on toys or still have it in their ETrade accounts! The Gov/IRS has already quit taxing people on these gains if they get foreclosed on, so this means many RE-FINANCING homeowners have sucked out $100,000s tax free! An awesome windfall for these “poor victims”!!!

    All proposals, IRS rules and discussions to date have not addresed this. Any forgiveness, or modification, must take this into account to have my support. Nobody should make a profit, let alone a tax free one, by losing or giving back their home!

    NO FORGIVENESS FOR RE-FINANCE PROFIT!

    .

  • Don't Forgive REFINANCES says:

    Why does Sean’s, and practically every articles on he housing crisis, fail to mention a crucial fact? Especially the ones in favor of handing Trillions of dollars to “home owners” via debt forgiveness and cramdowns?

    47% to 51%, depending on loan type, were RE-FINANCES, where home owners pulled out money. And often multiple times. They pocketed the money and either spent it on toys or still have it in their ETrade accounts! The Gov/IRS has already quit taxing people on these gains if they get foreclosed on, so this means many RE-FINANCING homeowners have sucked out $100,000s tax free! An awesome windfall for these “poor victims”!!!

    All proposals, IRS rules and discussions to date have not addresed this. Any forgiveness, or modification, must take this into account to have my support. Nobody should make a profit, let alone a tax free one, by losing or giving back their home!

    NO FORGIVENESS FOR RE-FINANCE PROFIT!

    .

    • Sean O'Toole says:

      If you read my whole 9 part series you’ll actually see that I think cash-out refi’s should be treated differently. That in those cases that debt should be converted to a personal loan, which in reality is what it was.

      I like this for two reasons:

      For the homeowner it clearly demonstrates that the thousands they pulled out to do home improvement, buy cars, boats, toys, etc. actually has a real cost – rather than hiding that cost in their “house” payment. Maybe, and this could be a stretch, it will wake people up and show them that by using home equity that new $10k Jetski, that is now worth $5k is going to cost them $30k over the 30 years they’ll be paying for it. And in many cases they’ll learn that their idiotic buying spree is what put them in bankruptcy.

      Now what you fail to realize in your “no-forgiveness” point of view is that lenders were at fault here too. The laws provide more protection to lenders who make home loans than personal loans. Lenders abused this by making dumb-ass cash-out refi loans to consumers that should never have received them. And now they whine when the possibility of bankruptcy cramdown is proposed. Cash-out refi lenders made personal loans – plain and simple. These lenders made the negative equity epidemic we now face possible. They also deserve no-forgiveness.

      So let’s restore balance: no forgiveness for homeowners, let them pay or face bankruptcy, and no forgiveness for lenders, let them work with homeowners to resolve their poorly made loans or face the other side of bankruptcy.

      What we can’t do is continue to just extend and pretend.

      For the lender, it will hopefully teach them that trying to hide personal loans under

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