I'm From the Government, and I'm Here to Help - Ronald Reagan

The government is at it again and as usual, they are bowing to industries whim. First they wanted to give us 'tax rebate' checks that will assist with either making a car payment or buying a few Chinese-made goods (hold the lead, please). Now they want to put a moratorium on home foreclosures.

While I like 'free' money as much as the next person, this cash-back plan is flawed. Theoretically, pumping a whole bunch of money into the economy should prop the economy up. The reality is that our society is mostly based on debt. House payments, car payments, credit card payments, second mortgages, student loans, personal loans, and any other payment made to pay off a debt consume a vast amount of most people's income. So when you get your check, are you going to pay down a debt or buy a big-ticket item? If you buy something, will it be American made? Or are the profits leaving our shores?

Now they want to stop lenders from foreclosing on people who are 90 days late on their mortgage payments. Actually, the plan is to give an additional 30 days to negotiate a more affordable mortgage before the house is taken.

Who came up with the idea of a moratorium on home foreclosures? The very same lenders that are trying to take the homes! Is this a favor to the homeowner? Or a way for the lenders to claim that they were forced into holding the bad loans by the government when they report even more dismal earnings throughout the year?

The real question to me is what happens at the end of the moratorium? Will these people magically have four months worth of mortgage payments to give to the lenders? Presumably the past-due payments would be rolled into a new mortgage, along with a closing fee, origination fee, servicing fees, and a new requirement for Private Mortgage Insurance. (Don't be surprised if some of the fees are waived as a 'favor' to the distressed homeowner. I can hear it now - Hey folks, we're all pitching in!) By refinancing, the lenders can claim income from the fees. When the impending default occurs, which it will for many, they will be able to pass the buck to the PMI companies instead of having to absorb the losses themselves. With the lower value of houses, more people will be above the 80% threshold for required PMI. I'll bet this requirement won't be waived...

How effective will this moratorium be? It could be very helpful for people who have lost their jobs and are starting new ones, or have a temporary illness or something that hasn't allowed them to work. However, for those who have lost their jobs and haven't been able to find a new one, it gives them 30 extra days to pack and find a cheap apartment to move into while applying for government assistance.

There is another group that is getting foreclosed on that couldn't care less - 'investors'. I use the term loosely because many of these people were actually gamblers, speculating on the industry and continued property appreciation (known as 'flippers'). They overextended themselves, rolling profits over into more and more plays. Many of them ended up with pretty close to the same money as they started, with the addition of a really bad credit rating. As a real estate investor, I know several 'flippers' who have stopped paying mortgages for properties that are no longer worth as much as the debt owed. Do these people deserve a bail-out too? Most likely they will be left out of the moratorium. Just as likely - they wouldn't use it anyway. Remember this the next time they talk of a record number of foreclosures. The more useful information is the number of primary homes that are being foreclosed on. Leave out the beach homes, the vacation homes, and the 'investment' properties.

The latest effort sponsored by the mortgage companies is a thinly veiled attempt to protect themselves from poor profits and loss of stock value due to their own foolish lending practices. Some home buyers will benefit in the short term, a few will benefit longer term, and many more than the companies would like to admit have already moved on. The mortgage companies were speculating just as much as the flippers, and don't deserve the luxury of blaming the government for their losses or a bail-out because of their poor decisions.

And what about this economic stimulus plan? The government is ignoring the larger problem facing our economy - job loss. All of the foolish band-aids they try to apply to prop up the economy for the short term are either useless or detrimental in the long term. Primary homeowners could pay their mortgages if they had jobs, even if their home lost value - assuming they didn't overextend themselves in the first place. However, someone without a job is unable to afford their current mortgage, and will be unable to afford their mortgage after the moratorium ends. Yes, even with their $500 tax rebate check. The government is in the mode of giving our jobs away, promoting off-shoring and encourages bringing in people from other countries to take our jobs on shore. How about giving companies tax breaks for creating new jobs in the country and giving them to American citizens? Maybe giving incentives to bring jobs back on shore? Encouraging industry to manufacture more things here? How about investing in the country's infrastructure? There are many ways to invest the estimated $150B - $180B that the stimulus plan is supposed to cost. Giving me a check for $500 that I will use to pay off a bill isn't going to help - assuming I qualify in the first place.




I saw some graphs saying 50% was going to use this to pay down debt, which isn't the plan of economists to stimulate the economy. I question this too when the issue is too much debt and repressed wages, how this is really going to do much.

25% were going to put the check into savings.

Insecurity leads to protection

I've heard similar figures. Much to the government's chagrin, when people are fearful of losing their jobs or having to take pay cuts they will try to protect themselves. Consumer confidence is down, with expectations even lower.

As a generalization, when people are not confident about their future, they will try to protect themselves. One way to do this is to pay off debts. Another way is to avoid taking on new debts. In an economy that's driven by the consumer, neither of these actions bodes well for continued economic expansion.

who is an investor?

Condo flippers are not the only "investors." Did homeowners expect the value of their property to go up? Were they planning to give a lot of it back to the government if the value rose unexpectedly? I would say the answers are respectively yes and no. People who own their primary residences are investors, and most of the problems are due not to mortgage rates but to the value of their investments declining. I don't think that it's necessarly a good idea to protect people from the consequences of a losing investment. Facing the problem of job loss as you suggest, on the other hand, would help the middle class and below without discriminating on the basis of whether they own or rent their homes.

Primary home as an investment

It is true that people generally (or should I say always) expect their primary homes to appreciate. I don't usually count a primary home as an investment for a couple of reasons (and I'm not alone on this):

1) You live there. If you didn't live there, you would live somewhere else and pay rent (and this house would no longer be your primary home). It is a necessity, while investments typically are purchased for the sole purpose of generating income or appreciation.

2) If you sell it, you have to find a new place to live. Typically, money from the sale of one house will be put into the purchase of another - assuming you are not upside down in the mortgage. If the house you sell has appreciated, the house you buy will likely have appreciated at a similar rate. If the value has declined, its likely that the value of the house you purchase has also declined. Unless you are downsizing, you will probably not see any real cash from the transaction. You are just rolling money from one home to another.

3) A primary home produces little, if any income. Unless you are renting out a room or the garage, it's not bringing in any money. It can help save money (tax benefits and eventually equity) but doesn't generate any on its own.

So while purchasing a home could be considered an investment in that its a large purchase and will hopefully appreciate, I see it as a way to satisfy a necessity rather than a pure, income producing and/or appreciating asset. They rarely, if ever produce an income and any appreciation they have is difficult to recapture.

One of the points I was trying to make was that even if the value of your primary residence declines, it's not the end of the world. Granted, it can be painful paying a mortgage that could be lower! If you didn't overextend yourself to get it, however, you are still getting value out of owning the property because you are living there.

I don't think the moratorium would affect people who are not overextended (except the few bad apples that exploit the plan). It's really a way for the mortgage industry to control their future instead of having the government impose something on them that would be onerous and wreck them financially (Hillary proposed a 90 day moratorium earlier in her campaign - who knows if she would have followed through). In the end, it only delays the inevitable for the owners who no longer have a job and have no hope of getting one in the near future.

My admittedly rambling point is that this is another example of the government ignoring what is really happening in the country. Keeping jobs here and the middle class strong is what is required to keep our country moving forward, not poorly thought out stop-gap measures.

Home ownership

It is good to buy a home and pay for it. There is a lot of personal satisfaction in owning a home. Our goal was always to have our home paid for by the time we retired. Paying rent or a mortgage would be very hard after retirement for many.

But I can't see paying on a home that you owe more for than you can get on the market. All those involved in the subprime loans should be tracked back to or traced and the profits they made given to the homeowner to bring down the costs of the mortgage and the interest rate should be fixed at the rate interest was when they purchased the home. If not, many would be better off to walk off and mail in the keys.

I don't know how the bankruptcy law affects this situation. That bill is so bad, they had to make an exception because of Katrina victims, they should make another exception for these homeowners.

Then they should pass regulations to make sure this doesn't happen again and cancel the new bankruptcy law that shouldn't have been passed in the first place.

When a bill is so bad, they have to make exceptions when a group of people get in financial difficulty, then they should kill the bill because it is just as bad, if you are the only one unfairly affected by the bankruptcy laws.

Bankruptcy bill

The worse bankruptcy bill was 2005 (Hillary did not vote for it much to the stuff being claimed). That bill, even when you declared bankruptcy, did not let you out of credit card debt. It became secured debt on the level of child care payments or other debt you shouldn't be able to get out of by declaring bankruptcy. It also will not let the court restructure mortgages or lower interest. It puts most people into Ch. 13, which is a restructuring, paying off for 5 years versus Ch. 7, which allowed debt to be erased.

Bloomberg article.

There is a new bill in the house that allows some Ch. 13 restructuring of home mortgages to avoid foreclosure.
It's a compromise, I don't know how good it is but it's pretty clear even the business community now realizes their corporate lobbied for bankruptcy bill is a disaster also for the ones who lobbied for it (ignoring the many lives they are destroying).

Senate vote record. I consider this vote to prove who are the bought and paid for Senators for many consumer action groups warned this bill was a true debtor's prison.