There is a simpler way to solve the current financial crisis than giving irresponsible financial institutions $700,000,000,000 to clear the debt off their books:
Allow adjustable rate mortgages to be refinanced to reasonable rates – or to not jack up at all.
And don’t allow mortgage loans to be sold on the financial market.
Currently, thousands of homeowners are in default on their mortgage payments, or facing foreclosure, because they cannot afford mortgage payments which keep resetting higher and higher through adjustable rate provisions.
Homeowners are NOT bailing on their homes simply because the value of their home has decreased. No one does that. But, if you cannot afford the mortgage, or it is an incredible struggle to pay, and the value of one’s home has decreased, then the question becomes – why struggle when its not worth it?
What has happened is that the mortgage lenders sold the arms that significantly jack-up monthly mortgage payments, far higher than wages have increased. Indeed, stagnant wages may have effectively decreased overall during the past few years with inflation.
These loans were then sold into packages on the financial market, and the packages were sliced and diced various ways. Think of it as being able to buy the profitable revenue stream from all the mortgages in Denver.
This has also meant the mortgage lenders no longer had the ability to act reasonably when a default occurred. Foreclosure is bad for everyone. Bad for the homeowner. A financial loser for the lender – especially with depressed home prices.
Since the mortgage lenders no longer “owned” their own loans – someone they sold the loans to did, and then whoever they sold it to, and so on, and so on – they could not renegotiate the loan because that would change the revenue stream expected by some end buyer.
That is, if the loan generates $100 in profit each month, if a lender renegotiates so the loan only generates $80 in profit, the lender can only do that with permission of some unknown loan buyer. That permission hasn’t been happening.
So you end up with this stupid situation where a homeowner says they cannot afford the increasing mortgage interest rate, and the lender says their hands are tied and cannot help out. Instead, the lender says the homeowner needs a new loan that will pay off the old one (thus paying off (giving profits) to everyone associated with the loan.) However, since the value of the property has decreased, and the homeowner is in default, no one will lend the homeowner the money needed to pay off the current loan. Rightly pissed at the ridiculousness of the situation, the homeowner goes into foreclosure and everyone loses.
Think of it this way. If you borrow $1000 from me and cannot pay it back, but offer $900 in lieu of defaulting and not paying anything, it would be absurd if I said my hands were tied and could not agree to anything except you getting a new loan that covers the $1000 debt.
This is not complex. It’s just stupid.
Here is how it should work:
If a company lends the money for a mortgage on a loan, they should remain responsible for it, and have the ability to act rationally to renegotiate an adjustable rate mortgage to save the loan if a homeowner gets into trouble. Even if the lender sells the loan, that sale should have contingencies which allow the loan to be renegotiated.
And you wonder why the financial institutions are fighting hard for the $700 billion bailout – and at the same time demanding that there not be bankruptcy relief allowing judges to reset loan rates to prevent foreclosure.
There is nothing here for the homeowner. They lose their home regardless of whether Wall Street gets its $700B or not. Wall Street, in its bailout, effectively a bankruptcy without a bankruptcy in which they shed their bad debts but keep their assets, is asking for the biggest windfall from the government in history.
Wall Street says a bailout is needed now, now, now… otherwise we face a recession.
Really, so what.
The economy goes in cycles. It has never grown forever. Recessions happen. Sure, they’re not pleasant, but they also help weed out irresponsible companies who gave their CEO’S TENS OF MILLIONS IF NOT HUNDRED MILLION DOLLAR PAYOUTS (in cash, stock options, or other equivalents). A bailout should not occur just because there is fear of a recession. Heck, liberal media outlets trying to help Obama have been saying we’ve essentially been in a recession for the last year, even though the economy has been growing at very small rate.
I don’t know about you, but before giving some irresponsible company $700B I’d rather own the company, install my own board and officers, and then pump in the cash so as to make sure the investment is worthwhile. But you can bet the fat cats would reject that offer. Sadly, if the government is going to drop $700B on the financial institutions, maybe it should just nationalize them.
But then again, there is a simple solution to the financial crisis. It just doesn’t make the fat cats fatter, and it is not a quickie, election year “solution.”