patrick.net

I agree the Obama plan will not help many of the people in the Bay Area. If he really wanted to keep people in their homes over the long term, giving bankruptcy courts the power to cram down loans would be the best solution. But, let's face a little reality. It was not buyers who were primarily to blame. In this housing bubble, the only people who were blameless were the sellers. In a majority of transactions, there was a seller, a buyer, and a bank providing the loan. The sellers' job is to get the highest price they can possibly get; the buyers' job is to get the best value they can get; the banks' job is to make sure value, price, and ability to pay are reasonably on par because it is their money at risk. This assumes no government intervention and in the Bay Area Fannie and Freddie were generally not in the picture until federally backed loan limits were increased.

When the banks' did not do their job, they allowed buyers to compete with one another with no regard to the buyers' ability pay and they did not look to see if value matched price. Sellers did exactly the correct thing in this environment, they raised their prices. As prices went up, buyers with sound financial sense and credit history were forced to compete with buyers that could just go to the bank and get a large loan they neither understood nor were able to pay off. That left buyers with financial sense and good credit two choices: 1) buy using the same silliness used by buyers that were being duped or 2) rent until heaven knows when.

Now some people want to fault the buyers for taking out "crazy loans." However, the reality is that a majority of these buyers during the bubble were purchasing with "other people's money" (the banks' money.) A good rule of thumb is: If it is your money at risk, you will be much more careful than if the money belongs to someone else. If you are the "someone else" you had better make sure you are looking after your money when you invest it.

The simplistic market idea of buyers and sellers agreeing on a price works in cash transactions. They do not work in credit transactions. In credit transactions, the creditor and seller must agree to a price. If creditors do not provide credit to the buyers...guess what...sellers' prices must come down. If the creditors provide an abundance of credit to buyers...guess what...sellers' prices go up. The creditors are investing in the buyers' position. If your creditors are foolish, they make bad investments. If they are smart, they make good investments.

Ryan says

If it is your money at risk, you will be much more careful than if the money belongs to someone else. If you are the “someone else” you had better make sure you are looking after your money when you invest it.

Good point. Therefore, there is no reason those homeowners to whine about. They played with others money. Game over. Pack your bag and rent somewhere else.

Going back to my orginal post, my understanding is that there are people out there who took out ARM loans and when the arm expired and the house was under water they ended up with rates that were 7+ % vs 5.25% or what would be a normal current rate. If that is not true, then I do not see how allowing people to refinance would make any difference unless they would be getting better then normal rates. I do not beleive we should be giving people abnormal rates ie 4%, but I think people who ended up with above normal rates should be able to refinance to the going market rate. If the person could not afford there home at a conforming rate, then yes they should lose there home because they never should have been able to buy it in the first place. I do not want my tax dollars to pay for people who over extended themself to have luxeries that I do not have because I bought what I could afford. I do however strongly feel that people who have abnormally high interest rates should have an opertunity to obtain a conforming rate even if the home is underwater. The intent would not be to bail out greedy people as much as it would be to lend a hand to people who have been set to abnormally high interest rates and cannot do anything to fix it because they are underwater and unable to refinance.