Stop the Subprime Bailout

Can you spare a few thousand dollars to pay somebody else's mortgage?

29 Jun 2008

Here's what's going on, as explained by Caroline Baum of Bloomberg.com:

During the housing boom of the last five years, people with bad credit histories, many of whom lied about their income and nature of employment, got mortgage loans they weren't qualified for to buy houses they couldn't afford. Now that house prices have stopped rising, and the house can't be refinanced or sold at a profit, Congress wants the taxpayer to subsidize the mortgages so these folks can remain in their unaffordable houses.

Politicians will exploit your emotions by saying they want to help people "keep their homes". But remember that the people in financial trouble already had houses. They got into this mess by trying to buy bigger and fancier houses than they could afford. If we do help them, it should involve them moving back into houses they can afford. No one will be out on the street. Anyone who could pay a mortgage can pay rent, which is much less.

How about requiring bailout participants to prove that they did not lie on their loan applications? We could start by reporting undocumented "stated income" from loan applications to the IRS.

Will the special aid package be indefinite? Can I go tomorrow and get a loan for a house I can't afford, and then in two years when the rates reset, will I also be eligible for free mortgage payments? Should speculators get preference above citizens who have been saving rather than borrowing? What message does that send about responsibility?

The proposed bailout is a moral hazard. It encourages the bad behavior that got us into this mess, because the punishment for foolish borrowing is applied to you and not to the people who made the bad decisions.

Bailing out borrowers also means bailing out their lenders. If lenders have to foreclose, then they have to sell the house for less than the loan amount, and this means an actual loss to the lenders. That threat of loss gives lenders a motive to help borrowers by restructuring the loans, maybe extending the time to repay. On the other hand, using our tax dollars to keep people in houses they cannot afford would be "socializing" lenders' losses, meaning taxpayers like you and me would be paying the bill and guaranteeing the profits of predatory lenders.

Under proposed bailouts, responsible people lose and have to give their money to gamblers, liars, and sleazy lenders. This is privatizing profits and socializing losses. It doesn't matter if you have been dutifully paying your monthly fixed-rate mortgage. It doesn't matter if you bought a smaller house based on what you could truly afford. And it doesn't matter if you're a renter who chose not to jump into the housing mania. Congress is proposing to make it your job to pay up for others' irresponsibility. Why don't they just tax you to cover Las Vegas gamblers' losses as well? That's pretty much what they're proposing.

But it's not too late. You can contact your representatives and ask them to stop this foolishness. Tell them to let the market correct itself. Tell them that it's okay for people to rent instead of owning. Tell them to punish predatory lenders, but not to punish you and me for things the lenders and borrowers did. Tell other people about this page and ask them to write their representatives too. Write the editorial page of your newspaper.

Discuss with other readers. Mail p@patrick.net if you have suggestions for changing this page.

Sen. Christopher Dodd (D-Conn) has said that Congress must consider providing aid to about 2.2 million subprime-mortgage borrowers who are at risk of defaulting and losing their homes (Bloomberg). Call his office at (202) 224-2823.

Sen. Hillary Clinton (D-NY) has called for a 'foreclosure time out' and for raising FHA loan limits to help more low-income home buyers (Reuters). Call her office at (202) 224-4451. If you can't get through, leave a message.

Write your own Representative and Senators! I'm told that handwritten letters get much higher priority than email, but anything will help.

• Find Your Representative
• Find Your Senators

• Eileen Roush (senate Banking committee consultant) Eileen.Roush@sen.ca.gov
• Mark Farouk (assembly Banking committee consultant) Mark.Farouk@asm.ca.gov

  SAMPLE LETTER - If you are at a loss for words, copy the following letter into the email you send to your Representative, and be sure to include your rep's name and your name and location before sending :-)

  Dear X Representative,
  
  Please do not support the efforts to bail out subprime
  borrowers with my tax dollars. As a responsible citizen, I
  do not feel it is right for you to ask me to pay for other
  peoples' financial mistakes, especially since a bailout
  encourages sleazy lenders to keep on making predatory loans,
  with the assumption that taxpayers are on the hook.
  
  I appreciate the goal of helping people to have access to
  housing, but the proposed subprime bailout will only reward
  people who acted irresponsibly, and it will punish people
  who work hard and diligently manage their finances by not
  buying houses which they cannot afford.
  
  The housing market has begun a process of correction. This
  is necessary in order to keep housing affordable in the
  long-term. Let the market correct so we can achieve
  stability again, and people are able to save and afford the
  house of their dreams over time. That really is the true
  American Dream.
  
  Sincerely,
  
  Your Name
  City, State
  

  ---

  And here is another possibility:

  Dear X Representative,
  
  Please do not support the efforts to bail out subprime borrowers using my tax
  dollars.
  
  I have been a resident of (yourstate) since (year), and have been a financially
  responsible citizen with an excellent credit history. I also have a college
  education with multiple degrees, and a stable employment with a good salary.
  Yet, I am not a home owner because home prices in (yourstate) have become
  unaffordable to a middle class person such as myself.
  
  Who is responsible for this mess? Certainly several parties such as unscrupulous
  real estate agents, lenders, and buyers with liar loans. Some of the actions
  taken by these parties are criminal, and we should be pursuing prosecution for
  various types of fraud.
  
  But instead of pursuing prosecution for financial fraud, congress is now in the
  process of trying to bail out the very people responsible for the unrealistic
  price run up in the first place.
  
  Who does this really help? Either they have knowingly obtained  liar loans, or
  they have made major financial errors out of their own doing. Should other
  people be responsible for the poor financial preparation and judgments of these
  subprime/liar loan borrowers?
  
  What about citizens like me? Who is going to give me a bail out for being a
  financially responsible citizen, so that I could buy the American dream like the
  subprime/liar loan borrowers?
  
  Please don't be deluded into believing that people who take out subprime and
  liar loans aren't greedy, or that they weren't aware of their actions.
  They certainly knew that they could not afford these homes before, and all of a
  sudden they were able to. How? Of course, they asked themselves this exact same
  question, and knew that they would have to pony up at a later time. They just
  simply thought that their house price would appreciate enough by then to cover
  the short fall. This is GREED GREED GREED. They wanted something for nothing,
  for which they would not have to work for at all.
  
  Please don't take MY American dream away by taking my tax money, and
  redistributing it to financially irresponsible borrowers.
  
  Sincerely,