Paulson wants to fix the mortgage mess. Let me rephrase that. Paulson wants to doctor a major wound with a band-aid. We don’t know a lot about Paulson’s plan so far, so it’s difficult to know how many people will be helped, but it’s safe to say that a lot of folks will be left out. Paulson’s plan is designed to help borrowers who can afford their payments now but who will be unable to afford the payments after their rate adjusts. If you can make the payments after your rate adjusts, you’re on your own. If you are already behind on your mortgage payments, no help for you. If you are able to refinance, you’re on your own. You are also excluded from Paulson’s plan if you hold an option ARM that isn’t subprime. Perhaps the biggest group left out of Paulson’s plan are those mortgages in danger of default that are investor-related.
Some people will be helped for sure. But is a bailout the right way to go? Karl Marx would be proud; that’s for sure. “From each according to his abilities, to each according to his needs” is what Marx taught us. Rest assured that this bailout is going to cost the taxpayers. Let’s take a second look at Marx’ premise. “From each according to his abilities (taxpayers), to each according to his needs (those of us not paying our mortgage payments).” This bailout wreaks of Marxism.
What will be the effect of Paulson’s plan? The first thing that pops to mind is: bureaucratic nightmare and fraud. If up to 70 percent of early payment defaults may be linked to borrower misrepresentations on mortgage loan applications (according to the FBIs Mortgage Fraud report), what will those liars do to fall under Paulson’s protective wing? Lie more — that’s what. If they told untruths to get the loans in the first place, they’ll tell whatever lies they have to tell in order to qualify for Paulson aid. According to Rapid Reporting, 6.38% of all applicants are not who they say they are. People lie to varying degrees, some fudge their income while others falsify their identities. The lies will be as thick as mosquitoes on an August night. Bailing these people out will be a giant mess.
“Liar loans” have hurt a lot of people. Banks are hording cash, so lender requirements are tightening across the board. The Paulson plan will also encourage irresponsible behavior on the part of future home buyers. If we bail these guys out, future delinquents will want a free ride too. Landlords will also be damaged as vacancy rates would decrease if these loans weren’t bailed out. If I were a landlord, I’d be peeved. If the free market were allowed to do its thing, landlords would benefit. Easy credit has allowed people to get into homes who could not otherwise afford homes, resulting in more home sales and inflated prices. Property prices will be kept at artificially inflated levels because homes that should go into foreclosure won’t. The bailout will also encourage future bad habits by bankers. Make bad investements? No worries. The governement will come through with a bailout. Real estate professionals will also suffer. With so many people upside down, the real estate market will continue to stall because so many people will be unable to sell their homes. At least foreclosures would get those properties back into the sales pool — and at adjusted prices. And last but not least, those who stand to benefit from Paulson’s aid could be delaying the inevitable. If their rates are frozen but housing prices continue to plummet, they could wind up losing their homes anyway because they can barely make the payments in the first place. An additional drop in housing prices could be the straw that broke the camel’s back. After all, loan modifications many times turn into defaults down the road. Loan modifications only mitigate the problem; they do not abolish it.
If Paulson really wants to help the victims of “predatory lending” and all those ornery mortgage brokers, he could amend the Fair Credit Reporting Act so that for the next few years foreclosures would only stay on a consumer’s credit report for 12 months. This would help all the folks in dire straits because of the mortgage debacle.
Let’s not forget that it costs bankers a lot of money when a loan defaults. Bankers don’t want to hold a giant fire sales. Bankers don’t want loans to default, so to help out the bankers, Joe taxpayer can foot the bill. We must stop pretending that we have a “free market.” Meddling in markets is commonplace. Paulson’s meddling may result in tragedy or failure. We’ll all have to wait and see.
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
~~Ludwig von Mises
Posted by: Wade Young | Denver Mortgage Broker
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{ 21 comments… read them below or add one }
Wade,
I like your style (very similar to mine). I wrote 1 post already with 2 others in the works that rip Paulson and this whole program, but I am waiting to see where I am going to post them. One will likely hit the airwaves here, I am sure of that.
Until then, thanks for showing readers that this proposal is not all it is cracked up to be.
Hi, Wade:
Extraordinary circumstances often force us to consider solutions that otherwise would be unpalatable.
Mr. Paulson has the heavy burden of trying to find a way to slow down the sinking subprime ship long enough to let some folks jump off and save themselves.
Moratoriums on foreclosures and other measures that governmental bodies and mortgage lenders might use are tools to protect the greater good when the underlying problem is widespread and beyond any sense of normalcy. They can’t help everyone so they hope to help those who have a reasonable chance to survive.
We had extraordinary measures in the Depression and in regional areas like Western Pennsylvania when the steel mills closed in my hometown in the late seventies and early eighties. Weather and severe economic interruptions bring out the big guns of foreclosure management. This is normal though not often noticed by the public.
If you want a laissez-faire mortgage market then hold on tight and forget about your world as you know it. Market corrections like a fever can kill. That’s why we have extremely intelligent people with much more brain power than I have to monitor the patient and decide when to administer a medicine.
Mortgage lenders allowed themselves to sacrifice underwriting standards for the sake of volume. They are paying a huge price for their folly.
So, I say thank you Mr. Paulson for stepping up and making hard decisions and taking the heat to try to save the few that have a chance.
Diane,
Ok, yes, Paulson is probably doing the best he can to handle the current situation. The bigger question is, should the government be screwing around with a “normal economic cycle”.
A healthy economy is going to have its good times and bad. The current dilemma, IMHO, stems from Greenspan’s making credit so cheap and for too long. That kind of “free money” creates “risky” lending and puts us in this position, just as it has in the past.
Now, letting the economic cycle continue without “interruption” will likely be the best course of action, not trying to “fix it”.
U.S. JUDGE ISSUES A WARRANT FOR PAULSON’S ARREST http://www.worldreports.org/news/103_u.s._judge_issues_a_
This plan is nonsense and will serve to not just delay the day of reckoning, but make it worse. Great article on the topic from DGA’s Michael Pento here:
http://www.greenfaucet.com/economy/paulson-vs-the-free-market
http://calculatedrisk.blogspot.com/2007/10/imf-mortgage-reset-chart.html
Paul: Take a look at this chart. See those two big waves coming on the horizon. That’s not normal and they are both bigger than what we have just come through.
The market that may recover somewhat on its own will likely still be weakened and may not survive the impact of the potentially horrendous damage to come.
They have to do something to mitigate damage.
It won’t be fair but hey you go with the flow and do what you have to do.
Was it fair that firefighter were able to save some homes in California but others had to be sacrificed for the greater good?
Choices have to be made and in this case they are seeking to protect the larger community and I am happy they are not afraid of public opinon.
“but it’s the circumstances…”
Nobody reads Hayek’s dire warning anymore? Hrmph.
Sorry, I meant Robert, before…
I’m sure am not a fan of big government, but we have to face the reality of what kind of a culture we have.
We’re not slipping into socialism. There are degress of socialism and we are already there but to a lesser extent than those who openly embrace it.
What started in the 60s has slowly degraded standards of education, personal accountability, et al., to the point that the average citizen is functionally illiterate.
Add to that this pervasive dependence upon TV for the vicarious lives of most and you have a culture immersed in delusion.
So, take this child-like steaming pot of fantasy, remove the quality control and lending standards - because the lenders all suffer from the same cultural delusion - and let it ride for 20 years. What do you get? You’re looking at it now.
Why our quasi-governmental agencies weren’t paying closer attention to audits I don’t know. Why no one listened to us ole time lenders, I don’t know, but Mom and Dad have finally noticed that the kids are tearing down the house and they are home to restore order.
What Mr. Paulson is doing is part of a solution that is awfully hard to find. They have to feel their way through this situation and I expect we’ll see more unusual fixes, but I don’t see Mr. Paulson as a socialist, do you?
So, let’s wait and see and we can all talk about it in about 12 months when the dust starts to settle.
Diane-
I like what you say about people being functionally illiterate. I shudder to think how people would behave if we ever had a financial collapse.
I find our cultural degradation really scary. Have you seen the movie Idiocracy? I’ve watched it twice, now. It scares the crap out of me and now I can’t drink Gatorade nor can I look at anyone else who is drinking it without prejudice.
Really, there’s nothing wrong with Gatorade but you’ve got to wonder what kind of crazy Kool-Aid’s been washing our brains.
I personally think it’s spelled TV.
Wade - What do you mean if. A financial collapse is likely what will happen to a certain extent, and is likely exactly what is needed to move forward.
DIane - It is already apparent that the government is dead set on screwing this up and the presidential contenders want to screw it up even more, all the while creating an illusion of helping.
Freezing rates and any other proposal so far is nothing more than a band-aid on a gaping wound that just prolongs death. Sorry for the graphic and bleak analogy, but I wanted to drive the point home. I personally don’t think it will get as bad as “death” as free markets tend to correct themselves.
Robert-
I’m talking total financial collapse, worse than the great depression. We’ll get through this rash of foreclosures. It’s what lies ahead that scares me. If you took every dollar in circulation it wouldn’t be enough to pay off our national debt. The numbers aren’t adding up. Unless the bankers have a trump card to play, financial collapse — complete and total — is in the future. It’s more a matter of how long. Money is injected into the economy by the Federal Reserve, but the money to pay the interest is not injected. They create $100 but they want $103 in return, but the $3 isn’t ever created. Eventually the numbers will no longer work and everything will go boom.
Diane-
We gave up TV 7 years ago. We play the occasional DVD on the computer but no TV. Television has ruined our country.
Wade - Great post, BTW.
Robert - I don’t disagree and I think it’s the slowing of the serious illness with the hope of avoiding death that’s at the heart of the issue.
It’s really a good old fashioned question, like what do you do with a fever? Fevers are kind of like our biological correction. They are a tool to restore health. The tool left alone will be very uncomfortable and if unchecked, the cure can even kill. So, do you take some aspirin to reduce it or do you let it do it’s job and kill whatever is inside that needs to be cured and take a chance that it won’t kill the body in the process?
Diane
You are delusional, a liar and extremely paranoid. I would bet that your subprime mortgage is adjusting soon. Let’s just hope that you, along with the other 2 million subprime “stated” borrowers, have an income that is real and not just based on having what you want when you want it!
Wade - We did too!! Isn’t life wonderful without TV?
It’s been 3 years for us. My husband still does a small one with rabbit ears for Leno’s monologue and we have to go elsewhere for Steeler games, but otherwise, we are TV free.
The sound of real life is pristine.
Well, hello, Rossq. I may be the Dragon Queen but I am not a liar. I allow anyone to say just about anything about my opinions and style, but liar, no.
You might find this surprising but most traditional mortgage lenders are pretty conservative. Ex-underwriter that I am, I live a fairly debt-free life.
So why, may I ask, do you think I am a liar?
Rossq - Calling someone a liar is not cool, especially if you cannot prove it. Throwing remarks like that out there only proves ignorance. May I kindly suggest remarking differently next time?
Wade - I agree we will not likely see a collapse the magnitude of the Great Depression, but we definitely need the markets to keep the cycle flowing so correction can take place and we move forward on the next ride up down the road. As for your remarks on the Fed and the scenario, I have one word, inflation.
Rossq-
Behave like a gentlemen, please.
Thanks, Robert, but I am interested in what is on Rossq’s mind.
Rossq - Please tell me what you believe is a lie. I am an advocate of free speech and I love a lively discussion. You have called me a liar, but you haven’t sunk to any low level of obscenities and so it’s still a reasonable discussion.
Please engage.
Has anyone had a personal experience with a loan modification with Ocwen. I am going thru one now, and I have satisfied the “stipulation” agreement, and have been waiting a month for them to send me the “official”loan modification papers.
When I call there, I am told the modification is “pending”!!(GULP)
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