Little Pink Houses For You and Me

In the latest round of pandering and vote-buying, John McCain has proposed that the U.S. Treasury buy up poorly performing mortgages and re-write them at lower principal values to allow the homeowner to keep their home.  What’s scariest about this is that Mr. McCain is the “fiscally conservative” candidate running in this election.  So, now the American voter who values fairness and prudent fiscal policy is left with no viable choice for President in this election.

Experts have estimated McCain’s program would cost $300 Billion; a hard number to swallow considering the government is $10 Trillion in debt already and headed into a period of declining tax revenues due to the recession.  But perhaps the most disturbing aspect of this is the utter lack of fairness.  Perhaps some specific examples will best illustrate.

Bill and Steve are both in the mid 30’s with young families and good jobs paying similar wages.  4 years ago both purchased homes.  Bill being of sound fiscal mind spent $300,000 on a 3 bedroom 1 and ½ bath home and put $60,000 down.  To find a house within his budget Bill had to go further into the suburbs than he wanted and so has a 25 mile one-way commute each day. He now has a 30 year fixed mortgage of $1500 per month and has never missed a payment.

Steve, on the other hand, wanted it all.  He bought a 5 bedroom, 3 bath house much closer to the city and in much better condition.  Of course this house cost much more than Bill’s, $600,000 to be exact.  To fund this purchase, Steve took advantage of a mortgage product that allowed him to put only $30,000 down and finance the house with an interest only mortgage for the first 3 years.  After that period the payments jumped to $4000 per month and Steve can no longer afford those payments.  He knew this would happen, but foolishly assumed his house would be worth more by now and he would be able to refinance – big mistake.

So, what happens now?  Bill’s house that he paid $300k for is now worth $210,000; he owes $235,000 and so is “upside down” $25,000.  But, Bill is making all his payments, his family is living comfortably if not lavishly and since he plans to be in the home for the next 30 or more years, what it’s worth today isn’t important.  Steve on the other hand is in a mess.  The house that he paid $600k for is now worth $420,000.  He owes $570,000, is “upside down” $150,000 and is missing payments.

Politicians of both parties are proposing we the taxpayer fix Steve’s problem for him by forcing the bank to “re-write the loan” (or as McCain proposes, have the Treasury buy the loan and re-write it).  They propose that since Steve’s house is only worth $420,000 that’s all he should have to pay for.  [Wouldn’t it be great if every time you paid too much for something the Magic Money Fairy came and refunded you the difference?]  Back in the real world, no one is proposing any help for Bill (not that he’s asking for any), they simply want him to keep paying his mortgage while as a taxpayer absorbing the $150,000 write-down on Steve’s house.

What just happened here?  Bill still lives in his humble home and still commutes 25 miles each way every day.  Meanwhile, Steve gets to keep a house he never should have bought and can’t afford.  He has a shorter commute, a better lifestyle, a more valuable asset when the market eventually turns around AND he gets his payments reduced at the expense of his fellow citizens.  Did I just fall down a rabbit hole?  Where’s Alice, ’cause I must be in Wonderland.

Americans must stop and think about what’s going on.  We must remember all of the little things we do in order to afford our homes.  Perhaps you drive an older car even though you’d love to buy a new one.  Maybe you and your family didn’t go on vacation this year because the money just wasn’t there.  Some of you might have decided against a renovation you were considering or not purchased a new flat-screen TV or any of a hundred other things.  Those Americans who pay their bills every month, deny themselves things they can’t afford, maintain a rainy day fund and generally employ sound fiscal policy are being taken advantage of in a grotesque and surprisingly out-in-the-open manner.

Our neighbors bought homes they couldn’t afford, they bought new cars, they went on vacation and bought the latest plasma TV.  Now the tab has come due for their excessive lifestyle and the politicians think those of us who have been responsible should pay it again.  Why not, we pay it every time, right?

Someone will undoubtedly comment, “What do you want to do throw them out in the street?”  No, of course not; no matter how irresponsible they have been, we must find a way to transition people into new living arrangements.  Some possible alternatives include:

–         Allow the foreclosure to move forward but require banks to delay eviction until a new residence can be found.

–         Re-write the loans in a way that makes them affordable today, but doesn’t saddle responsible taxpayers with other people’s debt.  For example, what if Steve’s loan from above was re-written so that he was making principal and interest payments on the $420,000 only for now.  The $150,000 the government is proposing to “write down” could instead be put on hold and come due in a 10 year balloon payment.  This way, the debt is still Steve’s, but he’s been provided a way out.  The bank won’t love it, but it’s got to be better for them than another foreclosure.

–         Maybe banks should set up separate real estate management firms, have these firms “buy” the homes out of foreclosure and then turn-around and rent the homes to the previous owner.  This way the individual gets to continue living there, the bank is clearing its balance sheet, the real estate management firm is generating cashflow and as an added bonus, the real estate market has less inventory sitting idle and driving down prices.

As a child, when I would complain about something being unfair, my mother would often reply, “Life isn’t fair”.  I’ve learned over the years that she was right, but c’mon, this is going TOO FAR!  Our politicians must stop assuming they can keep going to the well of fiscally responsible Americans (a well that has shrunk dramatically in recent years) every time they want to bail out an irresponsible group be they on Wall Street or across the street.

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