Help Paying Mortgages Elicits Anger

[alienlovechild 75]

The angry comments flooded in after the federal government announced it was expanding its program to assist unemployed homeowners, as well as borrowers who owe more on their mortgages than their homes are now worth.

Why, some asked on The New York Times Web site, should we have to pay for the mistakes of homeowners who lived far beyond their means when credit was easy to get? Shouldn’t they pay for their own mistakes?

A few wrote in to say the government was doing the right thing because helping those in need now would spare many more homeowners pain later.

All of the comments, however, went right to the heart of the criticism of all of the government’s bailout programs. After all, the aid for homeowners comes in the wake of bailouts for the banks and the American International Group, and then the auto industry. In every case, taxpayer money was on the line. So you can understand all of the anger about paying to fix problems not of their own making.

But it made me think about what would be at stake if the government did nothing at all. A government should consider the greater good over the long term, of course, and not just the immediate question of what is fair.

Still, the commenters raised a number of valid questions about the mortgage assistance program. Is the government just propping up the real estate market? Shouldn’t the market just run its course? And why do renters always fall so low on the economic totem pole?

Under the government’s latest initiative, for instance, some unemployed homeowners will be permitted to make smaller mortgage payments while they get back on their feet — yet unemployed renters receive nothing. Another part of the program increases the incentives paid to the banks to permanently reduce loan amounts for some homeowners who simply owe more than their homes are worth, as long as they are still current on their payments. No hardship is required.

But let’s not forget that many distressed homeowners were the victims of bad timing, poor understanding of the loans they were signing up for and a slumping economy. Many families stretched themselves too thin so they could buy into the American dream of home ownership — an idea supported by both Democrats and Republicans, not to mention the tax code. And some people simply had the misfortune to buy at the top of the market in precisely the wrong area.

“It shouldn’t be something people should be punished for,” said Robert J. Shiller, the Yale economist who helped develop Standard & Poor’s Case-Shiller Index of housing prices. “It was a national mistake. President Bush, in his weekly radio addresses, was extolling the benefits of homeownership. Implicit in this, he was telling people they were doing the right thing to take these highly leveraged mortgage loans. We can’t reasonably think people should be punished for doing that when there is a crisis that is not of their doing.”

Mark Zandi, chief economist for Moody’s Economy.com, made much the same argument. “It isn’t completely fair, but we are helping a large number of homeowners who got into this foreclosure nightmare through no fault of their own,” he said. “The odds are just too high that if we didn’t do something like this, the housing crash would continue on and undermine the recovery.

“Nothing in our economy does all that well when house prices are declining,” he went on, “because it’s still the most important asset in the family balance sheet.” Beyond that, he said: “No one will extend credit while home prices are declining. Further declines will push more homeowners underwater, resulting in more foreclosures and more house price declines.”

There is also the risk that more people will decide that they are so far underwater — that is, they owe so much more than their homes are worth — that it makes more sense to just walk away. Experts say people become more likely to walk once their mortgage exceeds their home value by more than 20 percent.

As of the third quarter of last year, more than 10 million homeowners — or about one in eight — owed more than 120 percent of their homes’ worth, according to Moody’s Economy.com. Nearly 4.6 million owed 50 percent more than their homes’ value.

The numbers make it easier to understand why the government is trying to strengthen the program — earlier efforts have not come close to helping the three million to four million homeowners the Treasury initially hoped. Mr. Zandi said he expected that the federal initiatives would ultimately help a fraction of those troubled borrowers, about 1.45 million.

But to truly break the cycle of declining home values, most experts agree that mortgage servicers must reduce the principal of the mortgage. (To be fair, Bank of America recently announced a plan to cut up to $3 billion for a select group of 45,000 borrowers.) As part of the expanded program, the Treasury is being paid higher incentives to erase principal. But some experts say they think banks will continue to drag their feet, which will prolong the foreclosure crisis.

Indeed, Casey Mulligan, an economics professor at the University of Chicago, argued that both the Bush and Obama administrations had focused too much on making house payments affordable, based on income levels, and not enough on reducing debt.

“What we are really doing is propping up the banks in another way,” he said. “They are very powerful politically and they are very good at getting the government to give them money. So I think that’s why we don’t deal with the real simple problem, which is negative equity. Banks believe, and they are probably right, that there are probably some homeowners they can squeeze the money out of and they don’t want to give up the opportunity to squeeze such people.”

http://www.nytimes.com/2010/04/03/your-money/03money.html

[Dan J 277]

The angry comments flooded in after the federal government announced it was expanding its program to assist unemployed homeowners, as well as borrowers who owe more on their mortgages than their homes are now worth.

Why, some asked on The New York Times Web site, should we have to pay for the mistakes of homeowners who lived far beyond their means when credit was easy to get? Shouldn’t they pay for their own mistakes?

A few wrote in to say the government was doing the right thing because helping those in need now would spare many more homeowners pain later.

All of the comments, however, went right to the heart of the criticism of all of the government’s bailout programs. After all, the aid for homeowners comes in the wake of bailouts for the banks and the American International Group, and then the auto industry. In every case, taxpayer money was on the line. So you can understand all of the anger about paying to fix problems not of their own making.

But it made me think about what would be at stake if the government did nothing at all. A government should consider the greater good over the long term, of course, and not just the immediate question of what is fair.

Still, the commenters raised a number of valid questions about the mortgage assistance program. Is the government just propping up the real estate market? Shouldn’t the market just run its course? And why do renters always fall so low on the economic totem pole?

Under the government’s latest initiative, for instance, some unemployed homeowners will be permitted to make smaller mortgage payments while they get back on their feet — yet unemployed renters receive nothing. Another part of the program increases the incentives paid to the banks to permanently reduce loan amounts for some homeowners who simply owe more than their homes are worth, as long as they are still current on their payments. No hardship is required.

But let’s not forget that many distressed homeowners were the victims of bad timing, poor understanding of the loans they were signing up for and a slumping economy. Many families stretched themselves too thin so they could buy into the American dream of home ownership — an idea supported by both Democrats and Republicans, not to mention the tax code. And some people simply had the misfortune to buy at the top of the market in precisely the wrong area.

“It shouldn’t be something people should be punished for,” said Robert J. Shiller, the Yale economist who helped develop Standard & Poor’s Case-Shiller Index of housing prices. “It was a national mistake. President Bush, in his weekly radio addresses, was extolling the benefits of homeownership. Implicit in this, he was telling people they were doing the right thing to take these highly leveraged mortgage loans. We can’t reasonably think people should be punished for doing that when there is a crisis that is not of their doing.”

Mark Zandi, chief economist for Moody’s Economy.com, made much the same argument. “It isn’t completely fair, but we are helping a large number of homeowners who got into this foreclosure nightmare through no fault of their own,” he said. “The odds are just too high that if we didn’t do something like this, the housing crash would continue on and undermine the recovery.

“Nothing in our economy does all that well when house prices are declining,” he went on, “because it’s still the most important asset in the family balance sheet.” Beyond that, he said: “No one will extend credit while home prices are declining. Further declines will push more homeowners underwater, resulting in more foreclosures and more house price declines.”

There is also the risk that more people will decide that they are so far underwater — that is, they owe so much more than their homes are worth — that it makes more sense to just walk away. Experts say people become more likely to walk once their mortgage exceeds their home value by more than 20 percent.

As of the third quarter of last year, more than 10 million homeowners — or about one in eight — owed more than 120 percent of their homes’ worth, according to Moody’s Economy.com. Nearly 4.6 million owed 50 percent more than their homes’ value.

The numbers make it easier to understand why the government is trying to strengthen the program — earlier efforts have not come close to helping the three million to four million homeowners the Treasury initially hoped. Mr. Zandi said he expected that the federal initiatives would ultimately help a fraction of those troubled borrowers, about 1.45 million.

But to truly break the cycle of declining home values, most experts agree that mortgage servicers must reduce the principal of the mortgage. (To be fair, Bank of America recently announced a plan to cut up to $3 billion for a select group of 45,000 borrowers.) As part of the expanded program, the Treasury is being paid higher incentives to erase principal. But some experts say they think banks will continue to drag their feet, which will prolong the foreclosure crisis.

Indeed, Casey Mulligan, an economics professor at the University of Chicago, argued that both the Bush and Obama administrations had focused too much on making house payments affordable, based on income levels, and not enough on reducing debt.

“What we are really doing is propping up the banks in another way,” he said. “They are very powerful politically and they are very good at getting the government to give them money. So I think that’s why we don’t deal with the real simple problem, which is negative equity. Banks believe, and they are probably right, that there are probably some homeowners they can squeeze the money out of and they don’t want to give up the opportunity to squeeze such people.”

http://www.nytimes.com/2010/04/03/your-money/03money.html

Are you selfish and believe people shouldn't get help?

Or do you see the bigger picture and effect on the economy of doing nothing?

[SMOKE 1,426]

Are you selfish and believe people shouldn't get help?

Or do you see the bigger picture and effect on the economy of doing nothing?

are you naive enough to think putting a band aid on a massive wound will make it heal faster?

or do you not see that spending money we don't have will only lead to more debt payments to our governments lenders & effect the standard of living for all americans in the future?

[Dan J 277]

are you naive enough to think putting a band aid on a massive wound will make it heal faster?

or do you not see that spending money we don't have will only lead to more debt payments to our governments lenders & effect the standard of living for all americans in the future?

You have to clean a wound before it will heal and sometimes it will hurt. But doing nothing as you propose will only have it fester and probably get worse.

[PhiLandShiR 18]

You have to clean a wound before it will heal and sometimes it will hurt. But doing nothing as you propose will only have it fester and probably get worse.

Yup. And just like a cancer, you need to cut it out. Its not treatable but simply must be removed.

[Florianns Man 7]

Are you selfish and believe people shouldn't get help?

Or do you see the bigger picture and effect on the economy of doing nothing?

do you believe that people that live within their means should be forced to pay for people to have nicer homes than they have???

[Danno 1,228]

Are you selfish and believe people shouldn't get help?

Or do you see the bigger picture and effect on the economy of doing nothing?

I believe the "even bigger picture" is the damage we have done to ourselves by becoming a "Bailout nation".

No matter the bad decisions or foolish actions taken, we seem to find an excuse why we should bail out of trouble the Addict, the single mother, the criminal, the business and even the industry.

IF you flinch at taking (by force), one parties money to gift it to another... you must be selfish!

[scandal 951]

Are you selfish and believe people shouldn't get help?

Or do you see the bigger picture and effect on the economy of doing nothing?

Why are you attacking ALC? All he did was quote an NYT article that presented both sides of an issue that very clearly has (at least) two sides. He didn't write anything himself as to which side of the issue he takes. Now, ALC is well known enough here as a conservative. So you might guess as to his stance, but since he didn't actually say anything, how can you call him 'selfish'?

I'll say this. I have a (deserved) reputation as a left-of-center liberal on most matters. On this issue - I'm very troubled by the precedent and the moral hazard posed by wiping out people's debt and letting them reset at reduced loan principals. There's something truly outrageous about this to those of us who make our monthly payments each month with no complaint, understanding that we signed a contract with our mortgage lender and are honor bound to keep it. This is not about politics, left or right. It's about fairness. If the system is perceived as rigged and unfair, then why should any of us make any effort to play fair?

[PhiLandShiR 18]

I'll say this. I have a (deserved) reputation as a left-of-center liberal on most matters. On this issue - I'm very troubled by the precedent and the moral hazard posed by wiping out people's debt and letting them reset at reduced loan principals. There's something truly outrageous about this to those of us who make our monthly payments each month with no complaint, understanding that we signed a contract with our mortgage lender and are honor bound to keep it. This is not about politics, left or right. It's about fairness. If the system is perceived as rigged and unfair, then why should any of us make any effort to play fair?

Hummm... I must be very far to the left indeed if you think you are LoC...

I find most people see the system as rigged and unfair once they get themselves in too deep. Its never their fault. Always someone else....

[justashooter 430]

Are you selfish and believe people shouldn't get help?

Or do you see the bigger picture and effect on the economy of doing nothing?

whoop! somebody has a house that is WAYYYYY underwater.

no thanks, buddy. i have 80% equity in my house, and am not interested in helping you get back to zero with dollars that could get me to 100%

[Dan J 277]

Why are you attacking ALC? All he did was quote an NYT article that presented both sides of an issue that very clearly has (at least) two sides. He didn't write anything himself as to which side of the issue he takes. Now, ALC is well known enough here as a conservative. So you might guess as to his stance, but since he didn't actually say anything, how can you call him 'selfish'?

I'll say this. I have a (deserved) reputation as a left-of-center liberal on most matters. On this issue - I'm very troubled by the precedent and the moral hazard posed by wiping out people's debt and letting them reset at reduced loan principals. There's something truly outrageous about this to those of us who make our monthly payments each month with no complaint, understanding that we signed a contract with our mortgage lender and are honor bound to keep it. This is not about politics, left or right. It's about fairness. If the system is perceived as rigged and unfair, then why should any of us make any effort to play fair?

I think fairness went out the window when mortgages became a commodity to be traded on the open market. And the market knows no honor.

That said, I think the country as a whole needs to do something about it. The recovery depends on consumer spending, and fewer consumers are going to be able to spend anything if all their money is tied up in keep up with mortgage payments.

Foreclosures depress home values around them and if you need to move and often leave behind vacant, unmaintained buildings. Which affects the home values for everyone else and can degrade the community around them.

whoop! somebody has a house that is WAYYYYY underwater.

no thanks, buddy. i have 80% equity in my house, and am not interested in helping you get back to zero with dollars that could get me to 100%

Actually no, not even close to being underwater or behind on payments. I just see the bigger picture, than just my own mortgage.

[Danno 1,228]

Why are you attacking ALC? All he did was quote an NYT article that presented both sides of an issue that very clearly has (at least) two sides. He didn't write anything himself as to which side of the issue he takes. Now, ALC is well known enough here as a conservative. So you might guess as to his stance, but since he didn't actually say anything, how can you call him 'selfish'?

I'll say this. I have a (deserved) reputation as a left-of-center liberal on most matters. On this issue - I'm very troubled by the precedent and the moral hazard posed by wiping out people's debt and letting them reset at reduced loan principals. There's something truly outrageous about this to those of us who make our monthly payments each month with no complaint, understanding that we signed a contract with our mortgage lender and are honor bound to keep it. This is not about politics, left or right. It's about fairness. If the system is perceived as rigged and unfair, then why should any of us make any effort to play fair?

YOu hit the nail on the head... it's about fairness.

[scandal 951]

I think fairness went out the window when mortgages became a commodity to be traded on the open market.

Huh? So the trading in stocks or bonds or futures is unfair, just because there is a secondary market in those things?

When a homeowner takes on a loan with his home as collateral, that is a biparty agreement between the lender and borrower. The lender now holds a note. This is an asset, and he's free to do with that asset as he pleases (especially as this freedom is written directly into the terms and conditions of the note itself). If he wants to sell off the note to someone else -that is his right. If the new buyer in turn wants to sell it off, so be it. That in essence is the nature of a secondary market, where it may be repeatedly bought and sold.

The American housing and credit markets have benefited tremendously from this secondary market in mortgages. It has diversified risk, increased efficiencies, and lowered costs. Yes, there were flagrant abuses. Most of them due to lax regulation of OTC transactions. I'm all in favor of increased regulation and of having centralized clearing on exchanges for CDOs and similar products. I am NOT in favor of throwing out the baby with the bathwater, and demonizing the trading in mortgages as being inherently evil. It's no more evil than having periodic auctions of government Treasuries and an active bond market.

Once again- no one was complaining about "unfair" lending when home prices were rising. Suddenly when home prices fall we're being told that these homeowners are "not at fault", that they were "talked into" their loans. Just when exactly did contract law and personal responsibility completely flee these American shores?

[alienlovechild 75]

I think fairness went out the window when mortgages became a commodity to be traded on the open market. And the market knows no honor.

That said, I think the country as a whole needs to do something about it. The recovery depends on consumer spending, and fewer consumers are going to be able to spend anything if all their money is tied up in keep up with mortgage payments.

Foreclosures depress home values around them and if you need to move and often leave behind vacant, unmaintained buildings. Which affects the home values for everyone else and can degrade the community around them.

Honor the marketplace means paying your bills for the goods and services you receive. The government's plan to fiddle with mortgages has been puny and highly unsuccessful as those who couldn't pay before had a high rate of default later.

Want to free up consumer spending? Have less of it tied to homes by allowing prices to drop until people are willing to buy. Many homes were grossly overvalued and unfortunately too many suckers bought into the idea that home prices will always go up 10% a year which is unsustainable. The one thing I'd like to see is streamlined short sales so people can move out and move on with their lives. People who are waiting for homes prices to back to 2006 bubble prices are living in dream world for now.

I bought a foreclosed home and which wasn't greatly devalued because it was in good condition and the neighborhood was pretty stable with very few homes for sale. A lot of people who aren't actively buying a home think they can make really low ball offers. One guy told me to offer 50% of the asking price no matter what. Maybe that works in places where prices had little relation to real values but the housing market is local and most places didn't see a huge swing in prices so why subsidize fools? Hell, why not pay off student loans, people lost money on their 401Ks or credit card debt?

The American Dream of homeownership isn't a right and historically percent of homeowners rarely waivered. The problem started when subprime loans were extended to people who couldn't handle a home. Many tried to move upmarket out of greed/speculation buying larger home that had little to do with spatial necessity as families are smaller today. Have those that got into this mess eat the losses.