Is Loan Restructure Disaster Relief? Or Disaster Times Two?

So let me see if I understand this. 

I bust my butt and save $100,000 so I can put down 20% on my $500,000 home  so I can get a lower interest rate. 

My neighbor does 100% financing and takes his $100,000 and buys a nice car and a boat. 

Home prices fall to $400,000. 

My neighbor gets his mortgage restructured to $400,000. 

Now we both have $400,000 mortgages but he still has his car and boat.  My downpayment is gone.

I just learned a good lesson.  It doesn't pay to bust your butt and save.  It's better to borrow as much as possible and spend whatever you have.

This is the moral hazard that this sort of thing encourages. 

The only way out of this mess is when everyone finally has to bust their butt and save again.  There's no other way.  Government can print money but they don't create any value that backs that money.  Sooner or later someone or something has to come up with the value that backs the money.  If not, money has no value and becomes worthless.  The longer we delude ourselves that we can magically make everyone whole again without any pain, the longer and more painful the recovery will be.

It's going to take me at least a few days to hash out my thoughts on paper/blog (still relatively busy down here). But I will be sure to replace the word "punish" with more the thought of not incentivizing people's past bad behavior. And the word "mandatory" with highly incentived.

Obviously nothing is going to be a panacea in this confligration of bad situations, but I still think loan modifications can be the best way to help as many people as possible, as many banks as possible, and have the least impact on tax payers.

Hey Tim, You are right on target. I liken to a child. A child hollers everytime his parents carries him to the store. Momma Idiot buy me candy if they don't scream louder Momma you b... buy me candy. so momma buys him candy. Now twenty years later after momma has supplied everything with no boundries and dies of heart ache or after the kid beats her to death for not buying him a new bike. The child holler Mr. Government buy me food, then buy me house. What you mean pay for it. Go see the man with the money fool.

Janet.. this is a great questions.. Look like only time will tell.. keep us posted.

Very good article and I agree with you.

Thanks,
Greg Adelman

Midwest Home Center LLC.
715-483-0012
612-735-4414 cell
612-395-5444 fax

 www.midwesthomecenter.com

For some of us who have been caught in the markets downward spiral and dont want to let go of our primary residences but also cant stand by as the only idiot carryign a 1million mortgage on a 600K house loan restructuring might be the fair way to bring equilibrium to equity for all of us

Janet,  In my example above, unless I need to sell, I really don't care that my home is only worth $250,000.  If I need to sell at that price, I'll either have to come up with that difference and feel the pain or the bank will get stuck with the loss and they will feel the pain. That is the risk both parties took when they entered into that contract.

If the bank takes the pain, I'm sure it will cause others pain because the bank won't be able to lend some money.  Uncle Sam can come through and give me the money to make everyone whole and no one today will feel the pain.  But Uncle Sam has to borrow the money and that money has to be paid back in the future.  So all you are doing is transferring the pain onto the shoulders of our children.  You might call that child abuse.  If you start changing the rules in the middle of the game, the uncertainty will bring the economy to a halt. 

Also, just to be clear. I stated that the bailout creates a moral hazard, not a moral dilemma.  They sound the same but are totally different.

I'm curious about something.  For those who believe that the government (or taxpayers) should 'bring equilibrium to equity for all of us,' should the government (taxpayers) do the same when the market is in the opposite, upward trend?  If you gain a higher rate of increased equity than your neighbor, should the government come in and give your neighbor a boost to level the playing field, or worse, should they take some of your equity to make it equal to all? 

The way I see it, the larger the risk, the larger the reward, but transversely, the larger the risk, the larger the risk.  I doubt many homeowners would complain if their homes suddenly were worth more than they paid, and I also doubt they'd want the government (or taxpayers) taking that appreciation away.

As said above, changing the rules in the middle of the game will bring the economy to a halt.

You're exactly right, Janet.  But as displayed in the comments above, the average consumer doesn't understand the real purpose of the possible restructuring.  They look at it as 'If he's getting restructured, then so should I, because we should all be equal.'  Yet adding to the moral harzard.

Janet - Let's see...$5.6 trillion outstanding FNMA/FHLMC mortgages times the convservative 12.5% estimated defaulting FNMA/FHLMC mortgages = $700 billion. Yet, allocations of these funds are targeted for: "White House spokeswoman Dana Perino confirmed that Paulson is actively considering injecting capital directly into banks, a power given in the new bailout bill...During Congressional debate on the bailout, injection of capital into banks was rarely, if ever, mentioned. The more-publicized proposal at the time was the proposal to remove toxic mortgage assets from bank balance sheets through innovative, but untested, auction strategies." http://www.marketwatch.com/news/story/paulson-borrows-page-buffett/story.aspx?guid=%7BF9ED4F97%2D67DB%2D4656%2DB1AA%2DF4A9FCD7B413%7D I think we the taxpayers should already be mad! How will there be any purchasing of MBS if the funds have already gone to plug the bleeding banks?

Ryan...  That is what the liberals are trying to do with the income tax code.  If you make more than someone else, they want to take some of yours and give it to them...  I think they call that privatizing the risk and socializing the profit... 

Janet...  Some of our "esteemed" representatives are saying that banks should be FORCED to restructure loans. 

Tim...  Would it be any better if when Mr. Irresponsible's loan includes a rider that the bank gets 20% of the sale of the home?  And just so you know, I don't think there should be a limit on the 20%... if the house sells for $700k later, and the loan has worked down to $300k, the bank should get $140k in addition to their payoff.

Janet: I think loan restructuring is better than foreclosure. The banks are in trouble and if they can modify an existing loan, it saves them. Plus, it obviously saves the homeowner which is probably even more important.