Who should be bailed out of the housing crisis?

By
Real Estate Broker/Owner with Short sale pathways

As our country braces for the worst housing crisis in history, blame for the fiasco is shifting from one entity to the next. Estimates on foreclosed homes have eclipsed the million home mark.  Foreclosures are on the rise and we still don't see an end or a solution to the problem. As I watch the nation's mortgage lenders go through their financial freefall, it makes me wonder. Who really is to blame and who, if anybody, should be bailed out?

On one front you have the mortgage bankers. These are the brilliant minds that force fed the people with interest only loans, low or no doc sub prime loans and 125% Loan to Value refi's. So why did they do it? That's easy. They saw the housing values on a steady rise and in some areas doubling and tripling values in only a year's time. So why not offer these types of loans. They knew that the houses would gain that value in no time. They could package their loans into a hedge fund, sell them on Wall Street and make a killing!

On another front you have the average citizen and a truck load of real estate speculators and investors. Joe homeowner is enticed by the prospect that his house has what seemed to be limitless rising equity so why not refinance, take some money out and go to Disney land! Right after buying a 54" flat screen T.V. and a Hummer H3.

Your typical real estate investors were eating it up as well. Buying, fixing up and building homes like there was no tomorrow. Home flippers were flipping, and home builders were building. It was all so easy and anyone could do it right? Well...

Let's not forget good ol' Uncle Sam who was loving the tax dollars that the new and upgraded housing brought into the local, state and national government. It was a boom time but that bubble that we used to hear about burst like a nuclear bomb.

Now that we have our volatile mixture of bleach and ammonia we can try to assign responsibility. The mortgage lenders claim that people should not have taken out the loan if they could not afford it and the investors made their own bed so lay in it.

Community organizations and advocates are screaming that the people were misled and enticed into accepting bad loans that they could not afford and did not understand. Both have valid points, now what is being done to stop the foreclosures?

Foreclosures have opened a gaping wound that affects the American people and our banking/lending system. The banks are all too willing to foreclose even though their stocks are collapsing and some lenders are going under. People who are facing foreclosure are just as willing to walk away and not look back.

What does this do for our future as a country? We will have millions of Americans who won't be able to get a loan on anything for years to come and banks that can't sell a mortgage backed security to anyone. No domestic or foreign investors will have any faith in these investments which translates into no money to loan to new home buyers. (We are already seeing this happen)

The FHA modernization bill that is being reviewed by congress has some highly controversial items attached with it. Many are referring to this as the Dodd-Countrywide bailout bill. If enacted, this will allow the banks with non-performing loans to dump them onto Fannie Mae to the tune of $300 billion dollars. This of course will be paid by the American people out of their taxes.

Why should the American people bailout a lender like countrywide who offered risky loans? It was a greedy investment decision with a lot of risk involved. Isn't that just a part of investing? You take the good with the bad right? You play you pay? In theory that is correct and private investors, builders, flippers and anyone else who made that investment mistake including people who invested in the mortgage backed securities are paying.

Now we have a big problem. If the big banks who offered these risky loans don't get some kind of a bailout, there will be no money to loan to homebuyers that are and will be in the marketplace looking to buy a house. When the Wall Street investors lose faith the money dries up. On that note, maybe the banks should have a bailout plan?

Hold on to that thought because here comes the flip side of the coin. If the MBA membership sees that the government will bail them out for their folly, won't they just do it again? It was only in the 1980's when the feds had to bail out the lenders from the savings and loan scandal. The people have a short memory but the banks... they know that in 15-20 years they can try another variation of subprime, no doc, 125% LTV loans, and they probably will.

Now let's get back to Joe homeowner. Should he have refinanced his house and cashed out with five grand. Probably not, but all of the pieces of the puzzle seemed intact. The appraisal came back with rising values. The neighbor down the street bought only a year ago and already sold it for a $100,000 profit. He can just refi in a year or two and get out of that ARM loan. At least that's what the mortgage broker told him. And, speculation about a housing bubble seemed completely unfounded. Bermuda, here we come!

POP! The bubble burst, Joe took a pay cut to keep his job and his house is now worth $80,000 less than what he refinanced it for and it is still dropping. He can barely make the payment and that great interest only loan is about to hit year three, which means his payment will almost double. All too familiar isn't it?

Right now there are over a million Joe's all of whom will not be able to get another loan for some time. Maybe they are paying their penance for being greedy, but what will this do to our economy? What if this turns into 3 million Joes who cannot get a loan for anything? Our free market economy depends upon goods being bought and sold in order to remain a thriving nation.

What are the answers that we are looking for? We all realize that foreclosures cannot continue at this rate. Banks are foreclosing at a record pace. Why don't they try harder to prevent foreclosure? Wouldn't it be in there best interest to turn there collections departments into home retention departments? Here is the simple answer. "It is not our policy or our job to seek a loss on our investment."

How about Joe homeowner? Why doesn't he try harder to get a loan remodification or work something out with the lender? The common response is equally as simple. "I called once or twice and they just told me to make the payment or lose the house."

As we all search for a reasonable answer to this problem the finger pointing continues. Maybe the government should give half of that 300 billion to try and offset foreclosure rather than just bail the banks out. What if communities get more involved with homeowner retention? Maybe the banks want to own these homes so that they can use it as leverage to weasel their way into the housing industry? They've tried before. Many people claim that this is just an effect of the market cycle and it will eventually right itself.

We are on a sinking ship that is listing heavily to starboard. If this ship sinks, it will create a whirl pool that will drag our country underwater for years. My opinion is that everyone needs to recognize this as a problem and work together to fix it. Everybody and nobody are at fault. The boom and bust are just a product of capitalism at its best and worst. It is part of the natural cycle that may only require a nudge in the right direction. In order to get the bilge pumps working, communities, lenders and the government all need to be involved in order to exact a fair and reasonable solution.

Comments (18)

Rob Jacobs
Short sale pathways - Rockwood, MI
Short Sale Specialist

Please comment with your views! What is the right solution? where are we heading? Who's at fault?

Jun 22, 2008 06:00 AM
DALIA KIBBY
Sellstate Partners Realty - Cooper City, FL
Selling Broward County Homes with Passion!

A generation ago, debt was a stigma.  No more.  Hence, everyone jumped on the bandwagon to get equity out of the family home.  Reckless behavior, at best.  Now, the fallout.  Sadly, we're all going to be hurt from the greed & recklessness that prevailed during those short 5 years.  I agree that banks should try harder to help homeowners who want to remain in their homes but have fallen on hard times.  A lot of these foreclosures could be averted.

Jun 22, 2008 06:02 AM
Dave Woodson
Dave Woodson - Chesterton, IN
Not the Average Agent

It is hard to say who do we bailout.  I am against the big ones as they are the ones that over-leveraged the funds and help create this mess. 

Jun 22, 2008 06:05 AM
Chris Horton
Horton's Lawn Care L.L.C. - Burton, MI

There were also many 1st time home buyers who got caught up in the ARM game who were just trying to and finally got a chance at the amercian dream and are now back renting or on the street because the banks got super greedy and knew they could take advantage of the situation. Like you said it wasn't the 1st time the banks did something like this, why should we keep bailing them out... we shouldn't.

Jun 22, 2008 06:06 AM
Steve Loynd
Alpine Lakes Real Estate Inc., - Lincoln, NH
800-926-5653, White Mountains NH

Rob- No one is to blame while at the same time everyone is to blame, the kidnapped begin to sympathize with the kidnapper, is that what I'm reading? I do agree that something has to be done and there is no long term benefit to pointing fingers but so the culprit doesn't rob the stagecoach again we should hang his picture at the post office (at the very least). OK let the healing begin and save the ship before it goes under I can agree with that no matter who steered us into the path of the iceberg. Steve

Jun 22, 2008 06:06 AM
Carrie Perez
Elk Rapids, MI
MBA

Awesome post! My strong opinion is that anyone who receives assistance of any (especially hard working taxpayer dollars!)kind should be required to stick to very strict requirements such as education in maintaining their credit(score) and how to handle family finances for example. Handouts do not ever make for a strong community-education and training will. Giving away fish is no good-teaching to fish is-simple as that. HI am adding you as an associate-good to keep open connections in the state, especially now.

Jun 22, 2008 06:07 AM
Carrie Perez
Elk Rapids, MI
MBA

I agree with the other posts, too-it was a combination of those who did not know any better taking ARMS or loans bigger than they could truly handle, yet when the lenders weren't required to even approve the loan payment amounts that could be handled after the ARM ended and the payments went up it is their fault as well. It is sad, because it is true that you see people going into foreclosure who have a PS3, H3, boat, ipods, the coolest gadgets and newest things in their home, yet they fell behind on payments for the home. We have friends who did that and we have seen them face it twice-they unfortunately do not change their ways.

Jun 22, 2008 06:20 AM
Rob Jacobs
Short sale pathways - Rockwood, MI
Short Sale Specialist

Thanks everyone for your comments. My biggest fear at this juncture is that the federal government steps in and over regulates everything. The solution and healing will not be easy but NAR needs to keep tabs on the legislation that goes through congress. All of the lobbyists on both sides of this fiasco are out there banging their drums. I only hope that the solution is not lopsided.

Jun 23, 2008 12:48 PM
Anonymous
Nick

I think the banks should step up their efforts on the loss mitigation side. Many lenders are already doing more loan modification/short sale volume in a month than they did in all of 2007, but it seems there's still some reluctance. Perhaps they are awaiting a government bailout before they fully commit. I actually work for one of these loss mitigation companies and we are seeing the lenders becoming more willing to reach a loan modification or short sale agreement. It's just not entirely there, yet.

Jun 23, 2008 04:13 PM
#9
Anonymous
Bix Dugan

Sorry Rob, some of us are not at fault.   We resisted the same "gotta buy in now" frenzy (and greed) fueled temptation in Boston and Los Angeles, renting instead, because I saw where that was heading in the 1980's.  I waited until I was over 40 to buy my first home 12 years ago in the Pacific Northwest, scrimping and saving to assemble as large a downpayment as possible.  We stayed in that modest home while its paper value went screaming through the roof and our neighbors were trading up for McMansions up the street and calling us fools for not jumping in.  Most of them are stuck or gone now.  And we still have a roof over our heads, which was supposed to be the primary reason for buying a home in the first place.

So here's my solution: not one single g**damn dime for bailing out house flippers and wannabe lord 'n' ladies!  You flip, and at some point you fall.  What part of that is difficult? 

Oh, after we bought that house we also traded in our old guzzling Jeep Wagoneer for something that gets twice the mileage.  I notice that the McMansion and GarageMahal accessory du jour is the Toyota Land Crusher or Ford Extinction parked in the driveway.  And yeah, I am not real big on helping bail them out of that mess either by having my state cut gas taxes or any other stupid scheme.

Someday you have to take responsibility for your choices.  This is that day apparently. 

Jun 27, 2008 08:40 AM
#10
Carrie Perez
Elk Rapids, MI
MBA

Bix,

There are many aspects of this discussion when they ask "who" should be bailed out. Apparently, you were thinking what I was thinking. It is great that somebody said everything that so many are also thinking. Come, you all know you are, too! We all see what Bix sees...The hard-working people are what make this Country a great place. It is too bad the unwilling yet able are rewarded from the fruits of others labor all too often. And yes, over regulation by the government is a scary thought on many levels-what a year this will be. I can't wait for the political ads to end, though. Kudos to you Bix-for passing on the keeping up with the Jones's routine. 

Jul 01, 2008 04:39 PM
Anonymous
Bix Dugan

Thanks for the kind words Carrie!  You are much nicer than I am.  Ironically, my job is directly connected to the building industry (manufacturing side) and it hurts to see it go so far south so fast.  And I should have been careful to separate the "investors" (flippers) from those people who simply wanted to buy their first home through this.  I guess there are three groups:

1. Flippers-- yes, like the song says, they do "live in a world full of wonder."  Everyone loves the king of the sleaze.  Still in denial that the laws of economics can't be suspended and keep "what goes up" on that trajectory forever.  Housing 101: it's a great secondary investment (live in it and maybe make some money), but put that backwards and put yourself at risk.

2. Lord 'n' Lady McSillies-- buy twice as much McMansion as you can afford and get twice as burned.  Comparable to the Victorian monstrosities on the East Coast in the last two centuries except built from cardboard, so it looks like their Rancho Moolahs and Casa Costaplentis are destined to become the McSlums of this century (Atlantic monthly just did a great article on this). 

3. The truly innocent-- those who just wanted to buy a home: young families, couples, and got caught up in the struggle as the balloon kept bouncing out of reach.  The poor kids who maxed themselves out because a reasonable downpayment in the early-mid 1990's was now impossible based on bubble pricing really deserve our help.

I think the last group needs and deserves some relief-- I just want to make sure the first two aren't part of that package.  So a formula based on first-time buying, proportionate income, etc. would work.  I notice that the industry resists attempts to quantify how many dispossesed people are in what group, but I believe we must segment them in order to get the rest of us on board with helping out those who truly deserve it.

Also, I realize many people resent the term "McMansion," so in the spirit of fellowship here is a list of acceptable alternatives (courtesy of Wikipedia):

Beltway Baronial: (Washington, D.C. region)

Big Foot House: referring to the relatively large footprint of the building. Also can refer to the large size of the property on which the McMansion is located.

Big Hair House (Texas)

Bubba the Builder: Term used to describe to builders of cookie cutter style McMansions. Can also refer to developers that often use press board, liquid nails, particle board, and other low cost building materials in the construction of their properties. Derived from the TV program Bob the Builder.

Carpet Bomb Housing: structures built in great numbers in a relatively short period of time.

Faux chateau: describes a structure that utilizes French-style facades and features.

Frankenhouse

Gable-opolis: a reference to the multiple roof lines used to emphasize the mass of the building.

Garage Mahal: large, custom-built garages; or, garages renovated in to a home.

Herman House: A house that is too large for the overall scale of a neighborhood. Derived from the TV character Herman Munster who was so large as compared to normal sized surroundings that he often ended up destroying everything around himself, although inadvertently.

Hummer House

Lawyer Foyer: Also refers to the two-story entry space typically found on many McMansions which is meant to be visually overwhelming but which contributes little to the useful space of the house.

Mini-Taj Mahals

Monster Homes (Canada)

Muscle House: refers to the hefty, strongman look of the structure, reminiscent of the muscle cars of the late 1960s and early 1970s.

Northtowns Neo-Mediterranean: a variety of McMansion often associated with upper middle class Italian-Americans in north suburban Buffalo, New York.

Parachute home: refers to the alleged disregard for regional and immediate site considerations, i.e. the home had just been dropped from the sky.

Plywood Palazzo

Pocket Mansion: draws a comparison to the Deutschland-class cruiser of the early 1930s. These were called "pocket battleships" by the British because they featured heavy firepower in a relatively small vessel.

Persian Palace: a variety of McMansion stereotypically associated with wealthy Iranian-Americans in Los Angeles, sometimes incorporating elements of Iranian architecture.

Romanian house: largest house volume for a given budget. Usually three storey houses with minimal finishes, built to impress by size

Starter Castle

Texas Tuscan

Vulgaria: A neighborhood of McMansions, especially where older homes with smaller footprints were demolished and replaced

Jul 02, 2008 02:23 PM
#12
Jim Crawford
Maximum One Executive REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

I am a capitalist, that feels the adults make adult choices, and no one should be bailed out.  Banks that made risky loans better take it on the chin...they knew what they were doing.  Buyers that signe papers without reading the terms need to pay the consequences.  People that live beyond their nmeas are very foolish, and the taxpayers should not  be the ones that bail them out.

Jul 02, 2008 02:35 PM
Rob Jacobs
Short sale pathways - Rockwood, MI
Short Sale Specialist

Thanks everyone for your comments. It looks like Indymac will be paving the way for the future of banking bailouts. Keep track of how the FDIC handles this trend setting situation.

Jul 17, 2008 03:58 PM
Rob Jacobs
Short sale pathways - Rockwood, MI
Short Sale Specialist

Thanks everyone for your comments. It looks like Indymac will be paving the way for the future of banking bailouts. Keep track of how the FDIC handles this trend setting situation.

Jul 17, 2008 03:58 PM
Anonymous
Jeremy- UpsideDownFlorida.com, President

Nice Blog.  I don't understand wny it is so hard for the government to figure out.  These new requirments for FHA will NEVER help the masses.

Jeremy

Upsidedownflorida.com

Jul 24, 2008 07:50 AM
#16
Anonymous
Jane

What about the people who are put all of their money together to buy a bigger house than any of them could afford seperately and all live in the same house?  Talk about a resale problem for the people who live around them...  Several sets of moms and dads living in the same house paying one set of taxes for schools and everything else.  These people make me sick.

Jul 30, 2008 01:37 AM
#17
Anonymous
Pam

Three brother-in-laws pooled their money together to come up with a downpayment for a McMansion.  They decided who among them was legal enough to get the no doc, interest only loan.  This same family who all live in the same house, (5 adults and 4 kids) pretend to be rich while their kids are signed up on peachcare which is medicare for children in GA for people who make under a certain amount of money.  This is yet another way to scam the system.  I hope the bailout will not help this kind of homeowner.  I know this multifamily living situation hurts resale for the rest of us and this situation is very common in neighborhoods with McMansions.

Jul 30, 2008 03:45 AM
#18