Even here on Eleuthera (Bahamas), there is plenty of news about various taxpayer-funded schemes for bailing out subprime borrowers and lenders. All of them have one thing in common: they will be paid for from general tax revenue.
Imagine you bought your house in the early 1990s. You wanted to move in the early 2000s, but decided that a 100-year-old decrepit wooden shack wasn’t worth $1 million. So you sat in your old house and put your money in productive investments, such as the common stocks of businesses. You watched some of your neighbors go crazy with real estate greed, many of them making a lot of money, until some were left holding a 100-year-old decrepit wooden shack at $2 million and there were no more “greater fools.” You didn’t make any money in the real estate bubble, but at least you didn’t have to put any funds in and you didn’t lose any money either.
Fast forward to 2008. Governments at various levels have decided that they have to bail out people who spent more than the houses turned out to be worth and the financial companies who weren’t wise enough to notice that the U.S. is in fact not short of forests that can be cut down for more sprawl. Where will the money come from? You, me, and everyone else who did not participate in the bubble.
So… we missed buying real estate with a lot of leverage back in 2000 and missed the big ride up through 2004 or whenever. Now we get to buy that same real estate at a much higher price and without any upside at all since we won’t actually own any of it.
Very good point, and you’re the first I’ve seen to comment on it. I’m in the same boat (or rather, house) as you and it’s a bit frustrating that folks can be rewarded for following the wrong crowd just because it was a big enough crowd.
The big question is whether such bailouts help the country. Are these plans more to gain political votes, or to actually patch a hole in the economy? Where’s the bailouts for those who lost a fortune in the dot-com bubble?
Or instead do nothing, and let the banks foreclose on the fools. Will it affect your property values when half your neighborhood is boarded up shacks? Unfortunately, we’re all in the same boat with those fools whether we like it or not.
Now imagine that you are a couple of years out of college, looking into buying your first house. Real estate prices are still unimaginably high (at least, in the SF Bay Area where my job is). You are hoping that this bursting bubble reaches your neighbourhood so that you have a chance of actually owning a home someday…
And the government wants to take your tax dollars and use them to stop prices from returning to reality. I suspect that these bailouts hurt those of us who don’t own a home even more than those who do.
Couldn’t agree with you more Philip. We end up rewarding stupid behavior and punishing prudent investment.
Put in such stark terms, it makes me think a better move would be to auction off the debtors kidneys, livers, and children to pay their debts.
Or you never bought a house because even though you viewed tons of houses, you also read prolifically about the mortgages, housing values and economics you decided not to take a chance in your very expensive area on jumbo loans and ballooning payments…then the same ending.
Yep. We will be taking money away from people who didn’t buy houses becaue they couldn’t afford them and giving it to people who bought houses they couldn’t afford.
Actually, it’s one step worse than that. Many of the people in foreclosure were sub-prime borrowers on ARMs with teaser rates who put nothing down. These people have no assets to go after, no down payment to lose, and the house won’t sell for enough to cover the loan. Aside from damage to their credit (which was subprime anyway), the actual “owners” don’t stand to lose much. They probably got to “own” for less than their rent would have been (due to the teaser rates), and now they’ll go back to being renters.
The banks who made the loans stand to lose huge, though. This is what the bailout is really about. The banks loaned lots of money to people who aren’t going to pay it back. So now they want everyone else to chip in through taxes to cover their losses.
Any government backed bail-out of the foreclosure mess with effect a person who couldn’t afford a home very little, if any.
Interestingly, the hardest hit ares fall into two distinct categories:
They were either already part of a mad ruch of speculation (Florida, California and Nevada) or they were already downtrodden (Ohio).
Personally, I think Hillary or Obama’s universal healthcare plan costs to taxpayers will make this purported bail-out of bank and unfortunate buyers (which has not happened so far) look like a trip to the Five and Dime…
While I hate to hear “taxpayer-funded bailout” in any context, I tend to agree with Andy in that this would be small-change compared to the United States’ other financial issues. See Scott Burns’ (MIT grad!) latest column at
http://assetbuilder.com/blogs/scott_burns/archive/2008/02/22/hazard-at-the-extremes.aspx
for some reassurance as to the extent of the problem. I wish we could fix the monster Iraq money toilet so that issues like this would actually be our biggest financial concern as taxpayers.
I thought you’d enjoy this quote:
Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”
From:
http://www.nytimes.com/2008/02/29/us/29walks.html
Philip,
Please read Calculated Risk. Tanta will give you an education about the various proposals to bail out the banks and hedge funds. Don’t think for a minute that any bail out will be to “save” greedy homedebtors. That will be the “cover” story but the banks and wall street are the targets. No millonair R or D in congress gives a hoot about stupid Joe6pack.
Steve,
If a person chooses to “give their house back to the bank” they would ruin their credit standing. A foreclosure or even a deed in lieu of foreclosure ranks as one of the the worst scores a person can suffer on their credit report.
It would be very much worse than renting if one suffered a foreclosure and ruined their credit.