A bailout for the 'undeserving'

The L.A. Times this morning explores the issue of whether the government should offer mortgage aid -- a bailout, for lack of a better word -- to the "undeserving." Peter Gosselin's front-page article observes that, in previous crises, the government has erred on the side of helping the overall economy rather than trying to determine who deserves special aid and who doesn't.

"And in almost every instance, a simple calculation tipped the balance in favor of action: Although some who were undeserving might end up being helped along the way, the benefit to society as a whole was simply too substantial to ignore."

A couple of thoughts: You would think it goes without saying that many oppose these mortgage aid packages for very specific reasons, but it doesn't -- so I'll say it: Many Americans oppose mortgage aid right now because they believe lenders and borrowers participated in an unsustainable housing bubble that drove up prices, enriched millions, gave the economy a false appearance of prosperity, and made housing unaffordable to those who refused to take foolish mortgage risks. This argument is particularly potent in Los Angeles, where soaring housing prices long ago lost touch with income levels, and home ownership levels lag well behind national rates.

Many of these bailout critics also argue -- they argue it here daily -- that government attempts to prop up housing prices will ultimately prolong the housing crisis rather than shorten it. In other words, there are two arguments here: the first is fairness, the second is whether a broad bailout provides "a benefit to society as a whole" -- whether it will work.

Will a widespread bailout help the reckless and the undeserving? Probably.  Here's PIMCO economist Paul McCulley: ".. The inequities smell to high heaven, and that is one of the huge problems in dealing with it. It runs against the streak of basic fairness in a lot of Americans. You’re going to provide a handout to the fool. The fool is going to be rewarded and I, the taxpayer, will be put at risk at the margin for that handout to the fool. When all I did was exactly what I was supposed to do. Where is the fairness here? It’s a hard question to answer."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.

Comments

[Doug in Toronto]

That's the problem with things like this. It has to be either everyone or no one. If it's anywhere in the middle, cries of discrimination, favouritism, racism, immigrants, etc., etc., etc., will echo all the way to the courthouses, where the lawsuits will go on for decades.

[Laker]

I found this quote in the article: "...If borrowers failed to pay the new, smaller mortgage, Washington would do so...."

Correct me if I'm wrong, but my understanding from this is that if the borrower (speculator) gets bailed and get refinanced using the new FHA government loan, then he can simply stop paying but this time, Washington would pay FOR HIM. And he could live happily ever after in his home...
I'm sure Dodd & Frank will want to HELP and not evict the poor fella...

Can you please send me the bill on the 5th of the month...
It feels great to pay other people's mortgages, credit card debt, and other refinanced goodies.....lovely!

[TakeFive]

Also consider that a lot of people that refi'd and then lost their homes already got a handout. They converted paper wealth into real money and spent it on vactions, boob jobs, whatever. Now we need to ease their pain? Forget it.

I would also argue that someone who bought their home in the last couple of years probably does not have as strong of an emotional attachment to the property as a longer term resident and that they will have an easier time accepting their loss and moving on.

[gary]

So if I understand this. And its information from KFI640 bill handall show. They will take my current value of $250,000.00 and wack off 15% making it $212,500.00 and I will pay a fixed 30 year at, oh lets say, 6%????
Yes my loan is $300k and yes this sounds wonderful and yes I will do it if I can because who wouldnt. But lets say I owe $200k and its worth $250k, how does that make me happy???? We are in sooooooooo much trouble if this actually makes sense and runs the course. We are in sooooooo deep.

[Jim from NoHo]

I've been waiting for the market to break since 2003, so I'm no fan of speculators.

But it seems like fans of this column regard ALL homebuyers who bought since then as greedy speculators. I'd say 40% were, but many of these people truly needed bigger houses with growing families and bought because they were told by real estate "professionals" that L.A. was running out of land and the low interest rates represented their last chance to buy a home.

Add to that the proof that many buyers (particularly minorities) were undeservedly pushed into subprime loans. So there are real victims amongst these buyers, let's not lose sight of that.

That being said, I have yet to hear any methodology of sorting these people out from the speculators. So I can see some good intentions for trying to help these people, but ultimately I don't think a way is going to be found.

[arroyogrande]

"Although some who were undeserving might end up being helped along the way, the benefit to society as a whole was simply too substantial to ignore."

Some food for thought...the same financial engineers that denied that this mess would (or could ever) happen, and even helped ENGINEER it through complex financial derivatives, are the same ones now screaming that we need a bail-out to keep the economy and American society from disintegrating completely (the "Armageddon" argument).

My question - why would I trust these financial geniuses when they say that a bail-out will is the only way out of this mess? What proof have they given me that it won't just make things worse, as well as putting even more taxpayer dollars at risk?

And why are so many reporters repeating the economic party line as gospel? I would expect that at least some have learned that the Powers That Be really don't know what they are doing any more than us ordinary folks.

I fully expect that, when any bailout makes problems worse (prolonging a downturn, discouraging prudent behavior such as saving your money, etc.), the argument will be "yes, it's bad, but it would have been much worse had we not taken decisive action!"

Maybe it's time to write your congressperson, cite your displeasure in reasonable terms, and then stop worrying, and "learn to love the bailout" (with apologies to Stanley Kubrick).

- arroyogrande

[Tom]

If the best thing the government could come up with to get the economy rolling again is a single $600 check that won't be seen months from now, I'm not too worried.

The banks are busily fighting asinine schemes the government (in this case the Fed) is cooking up like suggesting that principal be reduced to match the falling equity of a house. What a great idea! Let's make writedowns guaranteed across the board instead of taking them after foreclosure. Obviously, the banks want to avoid a glut of writedowns at all costs and are trying to meter them. That's why they've agreed to moratoriums on ARM resets.

The government needs to treat us all like big boys and girls and admit there is no way to fix this. A bunch of Monopoly money was conjured up out of nowhere, it changed hands, and then it disappeared. The people hurting are the ones left standing when the music stopped.

The government can't fill that void, nor should they try. Frankly, they don't have the cash anymore anyway. Buckle up, everyone.

[Lisa]

My thoughts precisely.

[Laker]

"...Also consider that a lot of people that refi'd and then lost their homes already got a handout. They converted paper wealth into real money and spent it on vacations, boob jobs, whatever...."

TakeFive, a good point you got there!.
Basically every one who refinanced and pulled cash out cannot be eligible for any handout, since reducing their mortgages means directly paying them cash!
However, if somebody had bought and overpaid, i could see how you can reduce his mortgage. In this case however, the previous seller is the one who got the big cash, and split town....
Anyway you look at it, the cash is sitting in somebody's pockets as we speak...

[are they crazy]

Jim from Noho: I don't understand your statement - they NEEDED bigger homes for growing families - Families don't just shoot up like spring flower bulbs - people choose their family size. Also, it appears you are mistaking want for need - people may want bigger houses, but most have way more house than they grew up in or anyone used to live in.
This is the problem with bailouts - everyone will try to justify getting something for nothing. No one was forced to buy any house at any time and none were forced to buy a house that was too expensive for their income, nor were they forced to take out exotic loans. I think it's going to become clear soon that many people that had houses with loans they could afford either sucked the equity out or decided to move up to a bigger house. Why should I pay for those mistakes?

[wha]

Compassionate points, Jim from NoHo.

But I'm sorry, these families who were duped or whatever into mortgages they can't afford need to take their lumps. They can always rent. It's sad and painful, but if they can't afford the house, then they can't afford the house- bottom line. Life isn't easy.

I'd also like to show some compassion for all the growing families out there who knew better and DIDN'T jump into this disaster. They're taking their lumps right now by being unable to buy at these prices and renting, waiting to buy.

[William Jones]

I am not a fan of the bail-out, but I might (MIGHT) go along with it if anyone who got mortgage forgiveness had a lien tacked on to his/her home that provided that if there is any increase in value realized through sale or subsequent refinance of the home the government should share in that gain or in the refinancing proceeds.

By way of example: Someone's mortgage is written down from $300,000 to $200,000 - $100,000 debt forgiveness. That person goes to sell his/her home a while from now and realizes a gain of, say, $50,000. Taxpayers should get half of that money, at least.

[MyLessThanPrimeBeef]

Bailouts are like cockroaches - when you see one, you are bound to find more. If you don't believe it, ask John Merriweather - the guy whose LTCM necessitated the last 'if you don't do it, the whole thing's going down' bailout and somehow is still working in the industry and whose current flagship fund, I read in the Daily Reckoning, is down 28% this year and therefore could use another bailout. (Shouldn't there be a restraining order for him, like for Frank Quattrone, to stay away from Wall Street?)

And why talk about bailouts when nothing is being done at all about the trillion dollar derivatives that have already taken down Bear Stearns literally overnight? Is the government just going to bury its head in the sand and hope these derivatives will somehow defuse by themselves?

March 17, 2007...it happened 3 weeks ago and still I can't get over that. If not for the good work of the military in containing him in Afganistan (or is it Pakistan), one might suspect Bin Ladin had something to do with it. It was as if the Empire State Building simply collapsed overnight. Just like that...vanished! (You'd think more people would want to know why. Simply bad managment at Bear Stearns? Industry-wide?) London Financial Times called it the day the decade-old dream of global free-market capitalism died and I think it will forever live in infamy, exacerbating what, according Geroge Soros, is the twilght of the sixty year credit cycle.

No, Paulson is no hero. Bernanke is no hero. Heroes come clean and tell the truth. A patriotic hero would send our best soliders into Lower Manhatten and take on those Wall Street terrorists who hold America hostage, who say to us, holding their mass weapons of wealth destruction in their hands, 'My way and the greater needs of the many, or your way and the end of all of us,' with those trillions and tirllions of open positions in derivatives they hide from the rest of the world under Level III assets and/or with some other off the balance sheet financial vehicles.

One is reminded that the battle between our country and the former Soviet Union was ultimately won through our financial strength, the communists having exhausted their money in the arms race and in Afganistan. Today, if we take out the stimulous effect on the economy via our fiscal deficit and consumption based on debt aided and abetted by those bad guys on Wall Street, and if we further suppress spending, just so we can compare, by matching the 50% savings rate of the hard working people in China, take in consideration the multiplier effect of consumption, we can legitimately ask which country has a bigger GDP. We don't have to wait 50 years to ask that question of which country is stronger financially. We can ask it now or in the much nearer future. Any economist cares to give it a try?

[TakeFive]

"...there are two arguments here: the first is fairness, the second is whether a broad bailout provides "a benefit to society as a whole" "

Flashback to 2001 for another “benefit to society”:

"Today, Countrywide's goals are embodied in the $1 Trillion Dollar We House America Challenge, the company's initiative that seeks to fund $1 trillion in home loans to minorities and lower-income borrowers, and to borrowers in lower-income communities, between 2001 and 2010. "

http://tiny.cc/JFSFp

[toby]

Investing can be rewarding or it can be painful.

This is one of those painful moments.

[Kathy]

Our financial system is turning out to be a lot like our judicial system, where the rich literally get away with murder. Unfortunately, just like in the judicial system, those who did not participate are being sentenced by the government to pay for the crimes of those who did. This bailout will not work, will not save the economy and will create more resentment and distrust of the government.

[andrew]

TakeFive ,

It would be hard to believe that anyone who did a cash-out refinance or took an equity line of credit would be eligible for any kind of reduction in loan amount. But you never know.

[sfvrealestate]

Whoa, no offence to LAT, but a readable summary of the issues appeared yesterday in NYT, along with a chart of how it all would work. The link is http://www.nytimes.com/2008/04/06/business/06
housing.html?_r=1&hp&oref=slogin -- sorry, I didn't tiny url. You can also read it on my blog (just click on sfvrealestate).
One quote from the article: "Advocates say that the program would help owners keep only the home they live in, not vacation or investment property, and no taxpayer money would be used to pay down mortgages."

[bullwinkle]

I just lost about $1500.00 in the aloha / ata failures. I had tickets on Aloha, replaced them with ata ... after buying the tickets a third time (AA this time) - i may get to travel to see the grandkids.

imho - the first of many business failures to hit consumers directly i am afraid.

Bottom line is, we now live in a economy where it is risky to leave your money on deposit with any corporation, that is the real danger to the economy - my faith in the system is certainly a bit more eroded

anyone care to bail me out?

The consumer will continue to take it in the shorts as wall street comes out like a rose ... get used to it . why should the guys who took out a giant loan get the breaks in a failing economic model?

[TOO BAD SO SAD]

Bought more than you could afford? Too bad, no one pays my bills. I bought a home in 2004 with money down at fix rate. Too bad for me the greedy seller did not disclose major damage to the property. Too bad for me he doesn't make enough money to pay his bills and got bailed out by the bankruptcy court.
It's time people stand up and take reposibility for their actions, you did not understand what you where signing. You should not have signed the loan documents, what made you think 40k a year could cover a 500k loan? Oh, and you leased a big SUV like everyone else too. I guess we should pay for that as well. Not with my tax money!

[sad_dad]

unbelievable....sounds like such a cliche story now: my family sat out while prices escalated, knowing in our pricey California area that we couldn't make the payments on a loan responsibly. Continued to get more depressed as prices skyrocketed and saw friends/neighbors cashing in and buying ridiculous amounts of stuff (boats, home additions, clothes, electronics). The wife and I wondered what we were doing wrong, knowing that our steep rent was a real financial hole, but seeing no way out...
Now we're finally seeing a turn in the market turn around to the point we could almost buy in, and the government wants to prop it all up, and ask ME to pay for it? This makes me even more depressed than I felt during the bubble...It's as if our representatives are ignoring this side of the story...

[xtine]

Jim from Noho - my poor man. Do you believe everything you hear? "they were told by real estate "professionals" that L.A. was running out of land and the low interest rates represented their last chance to buy a home."

A number of such professionals told me the same thing. Many of them were my friends. You know what I said?

I take home 2200/month after taxes/daycare/health insurance.
That means I can afford 1200/month for a mortgage.

You show me a 240K house and I'll buy it.

Oh? No decent property under 500K? SORRY I CANNOT AFFORD TO BUY A HOUSE MR/MS "PROFESSIONAL".

Common sense Noho - that's all. Stop treating people, especially people of color, like they are idiots who are too stupid to make sensible decisions.

[E]

Have you ever wondered how many of these politicians were flipping homes/condos and are now stuck holding the bag? So of course they want a bail out!

Time for some real investigative journalism.

[Fourth Generation]

But it is all but apparent that these BAILOUT schemes are not a matter of fairness but of who can pull the most lobbyists to save themselves. And we all know who those are; the lenders, builders and Wall Street thieves that got away with the benefits and obviously none of the risks. Welcome to american capitalism and the site of modern democracy. Where the rich and powerful rule and the rest just have to live with it.

[original thinker]

Paul McCulley needs to watch his wording.
This not a handout to "the fool". It is a handout
to the very calculating who never heard of market timing.
Especially with the option ARM player,
it is often an otherwise well-educated, high-income individual
with little economic sense. A speculator blinded by the
pure greed associated with panic buying.
This person is not a "fool". This person is a "Pig".
And if I may borrow a Wall Street expression,

"PIGS GET SLAUGHTERED!"

Let the squealing begin.