Home Mortgages – TARP

Posted by David A. Peterson on 11. November 2008 in Economics |

Guess what I read over the summer… Barbarians at the Gate by Bryan Burrough and John Helyar. This book was written about 20 years ago and details the Wall Street and corporate greed of the 1980s. 


No sooner did I get ¾ of the way through the book – BAM the US housing market melts down and all fingers started pointing to… Wall Street and corporate greed, go figure.


This fall the government passed the Troubled Asset Relief Program or TARP. This $700,000,000,000 (as in $700 billion) Wall Street bailout program is supposed to be used to buy up of toxic mortgages. These mortgages were sold by the unregulated greedy bankers that got ungodly rich. Unfortunately the home owners that needed the loans were sold way too much house and thus had very large notes to pay.


To make matters a little worse besides allowing unqualified people the ability to buy very big expensive homes, the greedy little bankers went a step further and allowed the same loans for investment properties and 2nd homes. I read an example of one of these buyers over the weekend. This poor women was to “give up to foreclosure” two of her homes. 


I really don’t blame the women in this case. Here she was setting up investment properties to rent. She is trying to live the American dream. I blame the greedy little bankers – I mean really, should you really lend money to a 25 year old to buy more than one house? Should some banker somewhere had stood up and said… “What happens if she can’t rent one of her houses?”


I’m past the point that greed was everywhere in this housing debacle. I often wondered over the past few years – who were buying all of these $500,000 homes in the Atlanta suburbs. I mean everybody can’t be a drug dealer – some of these people probably have regular jobs.


My concern now is that my own home’s value begins to stabilize. The stabilization is supposed to come from the TARP buying up the toxic mortgages. This makes a little sense – you already have a crap load of homes foreclosed and a whole bunch more about to be foreclosed on in the next 180 days.


If the TARP just did that it would probably bring some relief. Those unregulated greedy bankers could free up their balance sheets and begin to loan money to people who could actually be expected to pay back the loan – even in bad economic times. 


What I don’t want to see is the TARP used to “help” people who can’t afford their home in the good economic times by lowering the principle amount of the loan to a new amount. If you want to “help” them by assuming the interest on the loan while the house is being sold or the mortgage is being made whole, I would be okay with that.


Or for those people that have a real economic crisis going on like a health care crisis or the loss of their job – I would be okay with assuming the loan for a fixed period of time as a reverse mortgage where amount of money in the emergency loan is actually placed back on the principle of the mortgage.


What I don’t want to see with the TARP is principle forgiveness or interest rate adjustment. Here’s why.


Example: Let’s look at a $300,000 home where the principle is to be devalued by 20%.


From a macro economics point of view lowering the principle of the problem homes will just devalue an entire zip code. Thank you but please I don’t need any help devaluing my home. Using this devaluing method the only way you wouldn’t devalue all of the homes in that particular zip code is to go wink, wink and let the property appraisers say the devalued houses are still actually worth $300k. You can’t do that… the home owner will just borrow the equity.


From a micro economics point of view let’s look at one home that is devalued by 20%. The problem with all of these troubled notes is that the owners do not have any equity to borrow from – they have spent it paying their normal everyday bills. If you lower a mortgage by 20% you still don’t have any equity in the home. Note to all sane people out there I have a sneaky suspicion that the people who couldn’t afford a $3k/month mortgage will also have trouble paying for a $2.4k/month mortgage in these bad economic times. This is also true if you forgive a portion of the interest rate.


Again there are other ways to give temporary help to keep families in there homes like a reverse mortgage, or partial payments for a fixed time until the house is sold or the mortgage is made whole. These will help keep the value of your neighborhood and your zip code at the proper level.


We have to let the system penalize the bad behavior of the greedy corporate bankers. I mean if you were dumb enough to lend a 25 year old a lot of money to buy a couple of houses then I’m smart enough not to help you out.


One last point – the family that bought the foreclosed home next to me got it at a 20% discount. I bet just watching them that they have put at least 20% back into the home for improvements. Hmmm – the system can work if you let it.

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