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Yesterday, I wrote about some of the economic problems facing our country. I had a conversation last night with a friend who spent much of her working life in commercial real estate. She'd read the piece and wanted to talk about the plan to bail out homeowners. She pointed out that I hadn't directly mentioned anything about it, and wanted to explain to me why it was a bad idea to bail out homeowners.
Her opinion, which is shared by many people, is that the people who bought houses did this to themselves. They should have known that buying a $400,000 home with no money down on a $40,000 annual income was idiotic, at best. And there is some truth to that.
My friend, and many others, feel that they saved for a downpayment, took a 30 year fixed rate mortgage, gave up on extras to pay it off/pay it down, and shouldn't be made to pay for the mistakes of others who overspent, and used their homes as revolving ATMs.
People can argue about whether people should have known better, or whether they actually didn't understand the terms, and the real problem is that a deregulated lending system should never have allowed for no-doc loans. That's a long-term philosophical and historical discussion.
The real issue is "what do we do?" There's a town in California where fully 90% of the homes have mortgages on them where more is owed than what the houses are worth. Not a misprint: 90%. While that percentage can't spread nationwide, it could be approached in many communities in California, Arizona, Nevada, Florida, Michigan and Ohio.
What does it mean for a country if massive amounts of houses are abandoned? It means that the houses lose MORE value as vandals steal what they can. It means shrinking tax bases. Also, a rise in homelessness, decreased learning on the part of kids shuffled from school to school, and an inability of people to live anywhere near where they work. There are even public health concerns. All those abandoned swimming pools? The ones where no one pays the electricity to keep the pumps working, and water is left in them to preclude cracking? Meet your new neighbors: mosquitoes carrying diseases.
The homeowner bailout plans that I've looked at indicate that aid will only go to those homeowners who can pay off the mortgage at the new, lower, valuation and at a lower interest rate. It's a good idea, provided the loss is taken by the lenders.
Here's how it works. You bought a $350,000 house with no money down, and adjustable rate, and a 7-year balloon. Your plan had been to pay the first 3 years and then sell for $450,000. Unfortunately, your house is now worth $250,000, your monthly payment is about to hit $5000, and you can't get anyone to buy your house, even at $250,000, since there is precious little mortgage money.
You have NO SHOT at making the payments. You can walk away and mail the keys to the bank. Everyone loses.
Instead, the lenders (because there no longer is **a** lender, your mortgage has been sliced, diced, resold, repackaged, and sold several more times) agree to leaving your payment at the $2500 you can afford, they decrease the total due to $250,000, and extend the term of the loan. I didn't see this in any of my reading, but if I were writing the agreement, I'd put in a clause that precludes the borrowers from being allowed to take out a second or a HELOC so long as money was still owed on the mortgage.
Upside: an occupied home, tax revenue, kids in school, another family able to pay their bills, afford food, and life goes on.
It's not a perfect solution, but it's better than a nation of abandoned houses. But that's just my opinion, what's yours?