Foreclosures are a part of the Fix
posted by Realist Theorist @ 6:45 AM
The government announced a plan to lower foreclosures. They will use $75 billion of tax money for this. Supposedly redistributing our money to other people is in our self-interest! Here's how Obama tries to convince us of this: "By bringing down the foreclosure rate, it will help to shore up housing prices for everyone".
Banks do not want to sell homes. It is expensive. It makes sense for lenders to re-negotiate new terms if they think the home-owner can meet those lower terms. However, if the borrower cannot meet those lower terms, he is in the wrong house. Foreclosures are a temporary situation. They come from recognition of reality: the reality that -- with the assumptions of today -- the home-owner cannot pay his debt. The quickest way to fix the problem is to foreclose. Home prices will drop, and then they will rise again. A few years hence, prices would have reached a level that makes sense under new assumptions, and the wound will have healed.(1)
Keeping people in homes they cannot afford simply pushes the problem out to the future.
Very few of my middle-class neighbors got carried away by the housing boom. Even the few who did are basically responsible folk who made this one large mistake. Most of them can actually meet their current payments if they skimp and struggle for a couple of years. There is no shame in this. Some might negotiate lower payments that they could meet. Under Capitalism, most would figure they have been burned and have learnt their lesson.(2)
Instead, politicians from both parties want me to do more than help my neighbors. They want to convince me this is in my selfish interest. Why? Foreclosures do not bother me. And, I don't think my neighbors really want my charity. That is to say: they would not want it on those terms. However, when the charity is positioned as saving the economy, they find themselves in a happy position: turns out, that saving them is the right thing to do. They're more than willing to be rescued for my sake. They're happy to be saved if it helps me out!(3)
This post is to say: I don't mind the falling prices and the foreclosures. Any government force used on banks to stop foreclosures does not have my sanction. Every such tax-financed subsidy comes from someones real wealth. Part of it comes from mine. I will not pretend it is in my self-interest.
Notes:
(1) Already, the still-falling prices have caused the following: the number of existing homes being sold is not longer falling drastically. For more, check these Carpe Diem posts.
(2) Look around you at your own friends and neighbors. I think you will see that some made bad decisions, but most can get through this with a struggle.
(3) Not to suggest that people really identify it so explicitly, but they rationalize it thinking that if the government saves them it is "good for the economy".
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I bought my house in January, so I should be able to get a $7500 "tax credit" on my 2008 return as well as the new $8000 credit on my 2009 return. Talk about injustice! >:)
More power to you! Better you spend or invest it than the government.
I'm curious about the $7,500, though. What was that? Was there already some special tax-credit in place? You're talking about something other than the mortgage interest deduction for 2008, right?
I'm curious about the $7,500, though. What was that? Was there already some special tax-credit in place? You're talking about something other than the mortgage interest deduction for 2008, right?
The $7500 was a "tax credit" for first time buyers - it's actually a zero-interest loan that the government requires you to pay back over 15 years. They specified that even if you buy your house in 2009 (before June), you can still apply it to your 2008 return. Thus, there is some overlap with the new $8000 freebie that doesn't have to be paid back.
Countless first-time buyers are pissed off by the new stimulus because they bought their homes on December 31st 2008, for example, and if they had waited a day, they would have gotten a free $8000 check rather than a $7500 check that has to be paid back.
Countless first-time buyers are pissed off by the new stimulus because they bought their homes on December 31st 2008, for example, and if they had waited a day, they would have gotten a free $8000 check rather than a $7500 check that has to be paid back.
And countless more who bought their homes before the $7500 credit but after the huge market drop are even angrier. The lesson they've learned is to never buy anything big if there's the chance the government will come in to save the day - always put off until tomorrow what you don't absolutely need today. It's the destruction of progress.
In miniature, that's the story of the banks too. There's money around, but who is going to buy Bank-A only to find the government comes in a give Bank-B some type of super-sweet deal.
I haven't seen all the details of this new foreclosure-prevention plan, but Bloomberg reported that if lenders reduce payments to 38% of a person's income, the government will chip in money to reduce it further to 31%. So, I figure this will work like this:
Say a small-time businessman, earning $200K a year could only document $100K. So, he took an Alt-A (low documentation) loan where he paid $40/50K a year. He can now claim that since he only earns $100K, he will pay $31K a year, thank you very much. Where the Alt-A encouraged people to appear richer than they were, this new plan will encourage them to appear poorer.
I haven't seen all the details of this new foreclosure-prevention plan, but Bloomberg reported that if lenders reduce payments to 38% of a person's income, the government will chip in money to reduce it further to 31%. So, I figure this will work like this:
Say a small-time businessman, earning $200K a year could only document $100K. So, he took an Alt-A (low documentation) loan where he paid $40/50K a year. He can now claim that since he only earns $100K, he will pay $31K a year, thank you very much. Where the Alt-A encouraged people to appear richer than they were, this new plan will encourage them to appear poorer.
The tax gimmickry in home ownership is another thing that needs to go. Using the tax system to subsidizing leverage (mortgage interest deduction) and now to spur people who shouldn't buy houses into buying is just stupid. Why not just recognize that some people should not own a home, period.
I have two mortgages - one on a house in MI that I haven't been able to sell for 3 plus years (quite under-water) and one in NC. I'm paying both and rent out the one in MI to cover most of the mortgage payment for that. I have not asked nor will receive any help as I am current on both and can afford both on one paycheck.
I lived within my means. I did not buy a $400K house on $50K of income with nothing down. I did not use the equity in my home as a piggy bank to buy that 65" plasma and lease an Escalade. I lived within my means .
The people who did what I didn't are getting tax breaks, and their mortgages written down after they drained all equity out for their toys? Will these people lose their toys? Nope... they will keep all their stuff, get their mortgage written down and tax money from people like me.
Those who played by the rules will get a massive tax increase for their prudence. Sooner or later, a tipping point with these people will come.
I have two mortgages - one on a house in MI that I haven't been able to sell for 3 plus years (quite under-water) and one in NC. I'm paying both and rent out the one in MI to cover most of the mortgage payment for that. I have not asked nor will receive any help as I am current on both and can afford both on one paycheck.
I lived within my means. I did not buy a $400K house on $50K of income with nothing down. I did not use the equity in my home as a piggy bank to buy that 65" plasma and lease an Escalade. I lived within my means .
The people who did what I didn't are getting tax breaks, and their mortgages written down after they drained all equity out for their toys? Will these people lose their toys? Nope... they will keep all their stuff, get their mortgage written down and tax money from people like me.
Those who played by the rules will get a massive tax increase for their prudence. Sooner or later, a tipping point with these people will come.
Fiscal sanity could be restored by letting the chips fall where they may. What it amounts to, is this: compared with a year or two ago, we find ourselves with radically changed assumptions about how much real wealth we had, how much we could spend and so on.
If the new picture was crystal-clear certain, we'd be back at "fiscal sanity", even if it was at something much lower than the past. However, the picture is not clear. Some things just take time to unravel, as effects work their way from one person to another, and as people adopt short-term coping strategies but then realize they have to throw in their towel. Economy-wide liquidation of bad credit can take time, but even some serious historical situations have unraveled within a year or two.
The process is damaged when the government tries to slow down the unraveling. Firstly, it throws uncertainty into the process, since private players want to understand the new rules before they act. Further, even if the government's actions become fairly predictable, they are usually all designed to slow down the unraveling (a.k.a. "lessen the pain"). The only way to lessen pain is to take from Peter to pay Paul. Not only is this unfair, but subsidizing Peter delays recognition of reality.
One way in which governments redistribute wealth is by inflating money supply. Again, apart from being unfair, this throws a further spanner into the process of economic planning.
If the new picture was crystal-clear certain, we'd be back at "fiscal sanity", even if it was at something much lower than the past. However, the picture is not clear. Some things just take time to unravel, as effects work their way from one person to another, and as people adopt short-term coping strategies but then realize they have to throw in their towel. Economy-wide liquidation of bad credit can take time, but even some serious historical situations have unraveled within a year or two.
The process is damaged when the government tries to slow down the unraveling. Firstly, it throws uncertainty into the process, since private players want to understand the new rules before they act. Further, even if the government's actions become fairly predictable, they are usually all designed to slow down the unraveling (a.k.a. "lessen the pain"). The only way to lessen pain is to take from Peter to pay Paul. Not only is this unfair, but subsidizing Peter delays recognition of reality.
One way in which governments redistribute wealth is by inflating money supply. Again, apart from being unfair, this throws a further spanner into the process of economic planning.
Great perspective, and I'm with you on this one. My grandfather and father always encouraged smart investing in real estate, at wise prices (my grandfather always warned of mortgages). He held a personal home and rental properties through the depression. Though I'm not sure how to get around mortgages today, there definitely needed to be a correction.
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