Monday, October 27, 2008

Mortgage Mess

I'm hearing all this stuff about ways to help the mortgage holders, caught in this credit collapse, avoid foreclosure so they can stay in their homes. This sounds good but I don't see how it is going to work.

Let's just say that Joe bought a house on Harmony Lane and he is only paying interest on the house because he didn't have the money to put down on the house or to pay the principal but he is sure that he will be making more money in a couple of years or he'll sell the house for a profit. Mary bought the house next door. She saved up for a down payment and she bought a house on which she could pay the interest, principal and taxes. It was a stretch but she is making those payments every month.

A couple of years go by and Joe now needs to come up with the real cost of the house but he can't so he is in trouble and headed for foreclosure. On top of that the real estate bubble has popped and he can't sell the house for as much as his mortgage obligation. Mary's house isn't worth as much as she paid either but she is still meeting her mortgage obligations.

So from what I'm understanding about what both the candidates are saying about helping people in foreclosure, the government will somehow help Joe by giving him better interests rates and/or by refinancing the house at its current value.

Am I misunderstanding or misintrepreting these proposals or did Mary, faithful Mary who makes prudent decisions and lives up to her obligations, just get screwed.

10 comments:

Bob Mrotek said...

Billie,
I watch all of this with much amusement because I have never owned a house and really never had a desire to own one. It always just seemed to me to be too much trouble. All of my friends thought I was stupid but now perhaps I wasn't so stupid after all. Okay, okay, maybe just a little bit :)

Sparky said...

Damn Straight! That's exactly what happened. That's what happens every time the government gets involved in anything.

And, you get screwed as a renter at the same time... everyone gets screwed to the tune of 2,000 dollars a year. 700 billion divided by 300 million americans equals $2333 each. If they don't raise taxes to create the money they're spending, then they just created new money. 7% more money. roughly ten trillion dollars in circulation(mostly electronic and paper, not cash.), and they added 700 billion to the pot. There is just over 750 billion cash dollars circulating.

What this means is that the dollars in your pocket are worth less than they were before the money started rolling out. I haven't done the necessary work to figure out exactly how much less... Frankly I'm afraid of doing it. Bottom line unfortunately is that the more dollars you have, the more VALUE you loose. Spend your dollars now, before they're cheaper than toilet paper.

Thank you for taking the time to read my rant. I'm sorry for poluting your blog with it.

Steve Cotton said...

Babs -- You understand exactly what our candidates are saying. What is worse, they will use Mary's money to bail out Joe (and some of Joe's, as well). There are all sorts of schemes to distinguish between speculators and the deserving needy. But they will all fail. And it saddens me. I hate to see people in situations like both Joe and Mary. Interestingly, if Joe had made a killing, he would not have offered his profits as a thank you to the federal government. Privatizing profit; socializing losses.

Steve Cotton said...

Yikes, Billie. I actually knew I was on your site. This is what happens when we old guys start chatting up the ladies.

glorv1 said...

No you are not wrong, dear old Mary gets screwed just like any other person who thought and planned out what they were buying. People like Mary and us will have to help bail out people like Joe the nitwit, who screwed the system up. People like Joe who were only paying interest, now gets the best deal of his life. Viva La Mortgage. Take care billie

Tommy Williams said...

If you look only at the mortgages they both hold then, yes, Mary gets screwed. But money moves around in a much larger system and the experts--at least the ones we're hearing from in Washington and on TV--mostly believe that limiting the number of foreclosures helps the economy as a whole.

For example, the value of the other houses in the neighborhood go down when a house is foreclosed and sold at auction. So Mary suffers even more if Joe isn't bailed out.

But that's probably one of the smallest effects: the main thing I think they're trying to do is to maintain--or restore--confidence in the economy. The value of money is nothing but an agreement among the people who use it. So the economy gains value if enough people just believe that it is gaining value. There's a lot of feedback and that's part of the reason that things have gotten so bad.

Joe should never have gotten that loan in the first place but now that he has it, we can only decide what to do next: let his bank foreclose or help him stay in the house. It seems unfair to those who were diligent. It probably is but it's also better (at least that's the reasoning of the experts) to be unfair and help those who made foolish choices and thus stabilize the economy than to let things spiral out of control.

There are other experts, though, who think we have placed too-high a value on home ownership and that we need fewer people owning homes rather than more. I don't know enough about economics to know who is right.

lady jicky said...

If I was Mary - I would not be happy!

Cynthia said...

I think you understand.

As an ex-new home sales person (12 years) I was amazed by the standards for loan approval from the beginning of my career to the end.

No document loans did not require verification of income. Hard to believe! You could basically buy whatever you liked rather than what you could afford (based on historical data).

Read a little about Nehemiah. You'll be stunned. There were other "charitable" organizations involved in this as well, in many price points, and it was wide spread. (probably still is!!)

http://www.getdownpayment.com/content/faq.asp#1

Easy to understand what happened, especially in markets like Florida and California (and others), where home prices were rapidly climbing. People didn't care about their monthly payments; they cared about profits from flipping.

Big mess now!

Mexico Cooks! said...

And worse yet, that $700 billion bailout that is supposed to help "homeowners"--who will actually reap the benefits?

Why, the homeowners, of course. Are those homeowners Joe or Mary? Neither one! The homeowners are the lenders who hold the mortgages on all the houses in the USA.

I repeat: the LENDERS, not the people who live in the houses, whether the people be Joes or Marys.

I can't even think about all this without wanting to scream.

Cristina

Calypso said...

It's all about GREED amiga - a lot of short sighted people have put the rest of us in jeopardy.

Better to be in Mexico right now I think ;-) But, don't tell anybody.