Someone Has to Pay

By
Real Estate Agent with Atlanta Communities Real Estate Brokerage GREC #208281

The bursting of the housing bubble has created huge losses in wealth.  Many are now upside down on their home and feel trapped without any good solutions. 

A popular line in one of my kid's favorite movies, National Treasure, is "Someone has to go to jail".

When asset bubbles are burst, "Someone has to pay".  It's even more of a cold, hard reality because there is no one who can simply sign a pardon and get rid of all the losses. The losses are real and aren't going away by executive order.

The big question is, who pays?

In the free market usually the parties who freely entered into a contract with each other assume all of the risks along with all of the rewards.  People take out mortgages to buy homes, many with the hopes that they will be able to eventually sell for a higher price and make a nice profit.  What a great deal.  Instead of throwing their money away in rent payments, they become owners and make mortgage payments instead.  If they get 100% financing, it looks like a complete no-brainer decision.  Just by living in a home, one can become wealthy.  Many people did. Many people envied the home owners who made hundreds of thousands of dollars just by being an owner instead of a renter. 

But with opportunities for rewards, come the risks of being an owner.  Sure, many people ignored the risks of home prices actually going down.  Most thought that that was an impossible scenario.

Now many people owe $300,000 on a home that they might be able to sell for only $200,000.  They're in a real bind if they have to sell right now.  I feel for them.  It really stinks to be in that situation.

People are looking for solutions to get people out of this unfortunate situation.  Unfortunately, someone has to pay.

Some people seem to think that the government or banks should bail the homeowner out.  

  • Either by  giving them the $100,000 to cover them for their negative equity so that they can now sell at the market price of $200,000, or
     
  • they want the banks to reduce their mortgages down to $200,000.
  • A third alternative would be to give the potential home buyer an extra $100,000 so that they can pay the seller the full amount, $300,000, in order to pay off the mortgage.  This would keep homes prices at bubble prices and we can just make believe that nothing ever happened.

Any one of these sounds wonderful at first glance. But step back and figure out where the money is coming from.  If the government gives out money, they have to get it from somewhere.  Government doesn't create any wealth or real money. 

  1. It can only take it from one group and give it to another. So it can collect taxes from the many and give it to the fewer homeowners in trouble.
  2. It can borrow money which places the burden of repayment, with interest, on to the next generation. 
  3. It can just print more fiat money which then eventually devalues all of the current dollars in circulation.  This is basically just another form a taxation but it's more invisible and harder for people to pinpoint the blame.

    One way or another, someone has to pay.

Forcing the bankers to forgive the $100,000 usually sounds good to many people.  But follow that through and see who really takes the hit.  All of those mortgages were packaged into securities that were bought by investors.  Many of the investors were people like you and me who were just trying to make a little interest off the money that they worked so hard to save.  Many have retirement accounts that have funds that  invested in these "safe" bonds.  So if you require the banks to reduce the mortgage amounts, then all of these securities get reduced accordingly and anyone with any exposure to these securities takes the losses.  

The next thing you would need then is to have the government step in to guarantee all of these mortgage securities.  With what money?  See the paragragh above about how government gets their money.

I'm sorry to say that there just isn't any clean and easy solution to this mess. 

I have confidence that when government steps aside, the true free market process is the most efficient mechanism to get things where they need to be. 

Government has it's role, but not as the entity that decides the winners or the losers or the one who tries to spread the losses around.  Their role is to prosecute fraud and to provide transparency in the markets so that people can make the best informed decisions. 

Doing nothing sounds so lame and unresponsive.  But many times doing something just for the sake of trying to look helpful, actually worsens the situation and prolongs the agony.

The sooner the losses are taken, the sooner we can get back to some sanity.  

Posted by

 

 

About the Author:  Tim Maitski has been a full time Realtor since 1999. He has sold several hundreds of homes in areas around metro Atlanta.  Tim started with RE/MAX Greater Atlanta and is now with Atlanta Communities Real Estate Brokerage.

 

Along with blogging on ActiveRain, he provides one of the best real estate websites in Atlanta at www.HomeAtlanta.com .

 

His proprietary  "Maitski Line Reports" chart out the absorption rates over the past 14 years in 37 different market areas.  Know when it's a good time to buy or a good time to sell.    

 

His online Property Tax Calculator allows you to compare property taxes in many counties and cities around the Atlanta area.  He provides the Atlanta MLS Power Search Tool that allows searches of homes using over 35 specific criteria.

 

Over the years, Tim has optimized his business so that he now can offer a huge 50% commission rebate to his buyers.  The more experience one gets, the easier the job becomes.

 

Tim also has a "Five Days to Sold" System that uses an intensive marketing blitz to create a showing frenzy that creates urgency and offers.

 

Tim is always looking to LinkIn with anyone who is interested in building their social network.

 

View Tim Maitski ●Atlanta Realtor●'s profile on LinkedIn

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Re-Blogged 3 times:

Re-Blogged By Re-Blogged At
  1. Lane Bailey 01/30/2009 03:36 AM
  2. Diane Bell, Hilton Head Real Estate, Bluffton 01/30/2009 10:52 AM
  3. Shari Evans 01/31/2009 06:08 AM
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Rainmaker
507,880
Jerry Murphy, CRS, SRES
Long Realty West Valley - Anthem, AZ
Anthem, Phoenix, and Scottsdale AZ Real Estate

Many years ago I would have agreed with you Tim about letting the free market handle this situation.  But the problem is to deep, too systemic, and has the potential to lead to a cataclysim collapse in the global economy that would probably take a decade to correct.  For those who don't think that's possible, look at Japan in the 90's.  In Econ 101 we learn that yes, the free market often is best left to its own devices.  BUT in times of crises, such as this, when the private sector is not investing money into the markets the only entity that has the resources to inject into the economy IS the government.  The government is and always has been a part of our government.  It's duty is not only to protect the citizens from physical harm but also other calamities.  And this is a calamity.  If the government doesn't intercede and try to establish SOME type of floor to this market values will only continue to deterioriate, people will continue to lose jobs, businesses will close, leading to further job loses, and so on and so on.  Good post. Best of luck in '09.

Jan 30, 2009 10:14 AM #25
Rainer
8,966
Stephen Butler
RE/MAX CENTRAL - Las Vegas - Las Vegas, NV

One problem is trying to come up with a single "cookie cutter" solution for every problem.  From what I am seeing, every potential foreclosure is different and cannot all be handled with the same simple solution. 

For many, foreclosure or a short sale are the only reasonable solution and while most of those should have the deficiency written off, some should have a deficiency judgment against them.  Some would be more than happy to stay in a home that they are upside down if they were only able to get minor restructuring assisting from the lenders.  I am seeing little if any flexibility from the banks to tailor a program to the individual situation and I am not sure the lenders personnel are capable of doing so.

Also, in 1933 when Roosevelt took office, unemployment was going down and was at 17.8%.  When he started his third term in 1933, the unemployment rate was 17.8%.  He led us out of the depression???

Jan 30, 2009 10:40 AM #26
Rainer
225,598
Diane Bell, Hilton Head Real Estate, Bluffton
Charter 1 Real Estate, Hilton Head, Bluffton, SC - Hilton Head Island, SC

And, it's getting worse each day.  I really don't want to watch the news anymore.  How about you?  I would just like to hope that one of these government programs will work.

Jan 30, 2009 10:54 AM #27
Rainmaker
453,292
Kelly Young
The Platinum Group Realtors - Colorado Springs, CO
Colorado Springs Real Estate ~ 719-226-0126

I appreciate your post.  I agree with an earlier post that it will be amazing to see what we can do when we all buckle down and do the next right thing -- this doesn't necessarily mean the easiest, cheepest or most comfortable -- but the end, the right thing.

Jan 30, 2009 11:51 AM #28
Rainer
325,617
Judy Chapman
Referral Network of Illinois LLC - Chicago, IL

The really scary thing is that the Wall Street gang and their ilk seem to live on a different planet. They still don't get that they are the cause. And they keep doing the same stupid things hoping for a different outcome.

I'm waiting for intelligence to make a comeback. Right now, only stupidity reigns.

Jan 30, 2009 12:09 PM #29
Rainmaker
633,830
Eric Bouler
Gardner Realtors, Licensed in La. - New Orleans, LA
Listening to your Needs

Packaging the mortgages was the problem.  The risk were overlooked and the process had a lot of fraud in some locals. The problem now is that there is no market for these securties as people do not know what the government will do. It will work itself out.  Bad thing is that the better people at the banks may have been let go by this time. 

Jan 30, 2009 12:36 PM #30
Rainer
179,139
Mark MacKenzie
Phoenix, AZ

Hi Tim,

You are right somebody always has to pay, there is no free lunch.

With that being said, regardless if we have a free market solution or a bailout, everybody is still going to end up paying either through the loss of jobs and income, the loss of home equity, stock market losses or through a tax payer funded bailout.

Every American that either owns a home or owns stock in the market, is going to be affected by the housing depression.

But you're right, it is quite a mess and there is no easy answer.

 

Jan 30, 2009 01:20 PM #31
Rainer
211,341
Jack O'Neal
HomeSmart Elite Group - Gilbert, AZ

Great post Tim

This problem will have repercussions for Real Estate for the next 2-3 years.

  1. People have been lied to by agents and mortgage bankers. Telling them, like you said Tim, buy it no money down and make money with no risk. I go into communities where people were buying and flipping, and now they are 50% Bank Owned, Walk-Aways, or Short Sales, and the values have fallen 30-50%  (example 2006 sale $750,000 then, now $350,000 and 120 DOM, or $169,000 then, now $45,000 with 250 DOM.
  2. Banks are scared to provide a Jumbo Loan, or to provide any loan without a super credit score.
  3. The ironic part is some homeowners think their home is not included in this current decrease in value due to all the quality upgrades they have installed and that any new Buyer will recognize and pay for that quality. Current owners often don't realize that they paid  an inflated price for the home and the upgrades.
  4. Lastly the Realtor coming in at the listing appointment tell them a realistic value and they ask us to leave, list  with someone else, at the inflated price home. When their home sits on the market and doesn't sell at that inflated price  - they hate us more.
  5. GREED DID THIS AND NOTHING ELSE  MONEY IS NOT FREE, NEVER WAS AND NOW WON'T BE FOR QUITE SOME TIME.  YOU CANNOT PICK IT OFF THE MONEY TREE!! If you know of a money tree location, please email me. I have a ladder to get the high branches.

 Off topic but that's the way I see it

Jan 30, 2009 03:09 PM #32
Ambassador
2,011,077
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

It's going to be interesting to see what kind of fall out all of this will have.

Jan 30, 2009 03:24 PM #33
Rainmaker
560,622
Tim Maitski
Atlanta Communities Real Estate Brokerage - Atlanta, GA
Truth, Excellence and a Good Deal

I wanted to add another problem that government intervention does that creates a bigger problem. 

When the rules to the game can change on the whim of a politician, no one can make sound business decisions because of all of the uncertainty this creates.  Why would someone risk lending out money long term if they have the sense that all the rules will change next year? 

It also creates moral hazard.  when you have an insurance policy to fall back on, you might take more risks than you would have if you knew you would have to face the consequences of your decisions all by yourself. 

It's analogous to sports.  There are very specific rules of the game and both sides trust that the referees will enforce the rules impartially.  There are winners and losers and everyone accepts that. The game was played by the rules that everyone agreed to ahead of time.

If you bribe the refs or you get the league officials to change the rules in mid game in order to favor your team, then you are going to get a lot of angry people and might even have riots. 

Of course politicians love changing the rules.  It gives them power.  That is not the world I want to live in.  It's way over the top as it is, I don't want to see it get worse. 

Jan 30, 2009 11:59 PM #34
Ambassador
1,495,394
Jim Crawford
Maximum One Executive REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

I agree whole heartedly Tim.  This will be prolonged by the government intervention. In every state you have to be of legal majority, of sound mind to write a contract on a home.  You cannot purchase a home under duress.  So all the folks that purchased home that were much more than they could afford need to act responsibly.  Life happens, and it is all about personal responsibility.

Jan 31, 2009 12:50 AM #35
Rainer
4,918
Steve Blehl
The Home Depot/Referrals to Geba Realty - Milford, PA

Nice article. But, one thing is for certain......government will never step aside. They had their hands in this mess. And, government is the biggest "business" in the world. I just don't think they ever will step aside. One good thing that can come from all this is that mortgages will get into being based on income and ability to qualify and pay. Not like the "boom". Thanks for a thought provoking article.

Jan 31, 2009 04:03 AM #36
Rainmaker
28,221
Shari Evans
Better Properties Washington - Port Orchard, WA
Moments Like These

Chuck,

Thank you for the link... so many people don't understand that history is best seen from a distance!

Jan 31, 2009 06:07 AM #37
Rainmaker
28,221
Shari Evans
Better Properties Washington - Port Orchard, WA
Moments Like These

Tim,

I keep finding myself at your blog so I just subscribed! Keep up the great work!

Jan 31, 2009 06:11 AM #38
Rainmaker
33,518
Chuck Capan
REMAX River Cities - Moline, IL
REALTOR Licensed In IL. - Moline Homes Quad Citie

Jerry posted - "when the private sector is not investing money into the markets the only entity that has the resources to inject into the economy IS the government. "

Not to be nitpicking BUT...money actually comes from The Federal Reserve.  Let's leave the Fed argument for another day/post.  What this government injection is is PAPER...big difference.  To put it simply this trillion dollars is not sitting around in a warehouse somewhere.  Right now this money is blank rolls of paper and barrels of ink.  The "paper money" is not backed up by anything.  And yes someone will pay for that.  It is called inflation and it is coming around the corner.  The Federal Reserve will do its part to curb inflation...by raising interest rates.  To see a shocking interest rate history click on this http://www.freddiemac.com/pmms/pmms30.htm 

Jan 31, 2009 08:21 AM #39
Rainmaker
384,042
Bruce Brockmeier
Internet Marketing Consultant to REALTORS® - Yorba Linda, CA
Coached By Crouch

That is not the world I want to live in.  It's way over the top as it is, I don't want to see it get worse. 

Hi Tim,

We're all in this together.  Hopefully it will get better, but it could get worse.  We are burying ourselves, and our children, in debt which is not healthy for America.

Jan 31, 2009 09:17 AM #40
Ambassador
1,726,516
Richard Weisser
Richard Weisser Realty - Newnan, GA
Richard Weisser Retired Real Estate Professional

Tim...

I have always been one to let the chips fall where they may, and let the market correct itself. Apparently, I am in the minority!

Jan 31, 2009 10:34 AM #41
Ambassador
772,101
The Somers Team
The Somers Team at KW Philadelphia - Philadelphia, PA
Delivering Real Estate Happiness

Some good points are made here.  I think the stimulus should focus more on the demand side than the suppy side such as offering at least a $20,000 tax credit to ALL homebuyers.  In addition, low mortgage rates.  The supply side with all those options are just too messy.  In addition, the banks should be allowed to fail as well.

Jan 31, 2009 11:31 AM #42
Rainmaker
325,921
Esko Kiuru
Bethesda, MD

Tim,

The government, unfortunately, plays a key role in our financial system. If it had done nothing to keep AIG, Citigroup, Fannie Mae and others on their feet the system had collapsed last fall. It doesn't always have the best answers but it'll keep things moving.  

Jan 31, 2009 02:24 PM #43
Anonymous
Jack

Tim,

A wise economist, Lester Thurow, once said that America is the only place in the world where you can go bankrupt and be given another chance for success. In europe, you are branded a failure, in Japan and Far East areas, you are sometimes asked to take your own life. In the US, you can fail and get back up, and it is encouraged in our free market economy.

So let the people, banks, businesses fail. Let the papers, companies, auto makers, let them all fail, for failures allow for strength in the economy. Did any forest ever prosper from always having trees grow forever? This is a natural event, every now and then, we need fire to weed out the weak.

Feb 01, 2009 03:14 AM #44
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