My one beef with the bailout...
So evidently congress has come up with a compromise bailout bill. Most of it isn't surprising, and I can't really find fault with most of it. I'm certainly not psyched by the thought of the government buying tons of debt, but I figure it beats a total collapse of the credit markets.
But I do have one problem with it - part of it includes The federal government may stall foreclosure proceedings on home loans purchased under the plan. Great.
This seems unfair on a number of levels. First of all, it is essentially arbitrary welfare. If you are a homeowner in default, and your mortgage happened to be bundled into a security that the government eventually bought at auction as part of the bailout plan, you get to live in your house rent-free, on the taxpayer. If you are a homeowner in default, and a bank didn't sell your mortgage to the government, than have fun watching your stuff get carried to the curb. More importantly, if you are a responsible homeowner, who made sure when they bought a house that they could afford it, who is making the payments on their mortgage even though it's putting a big crunch on their financial budget, you get nothing, while your deadbeat neighbor gets to live for free on the government's dime - that is, your dime. Responsibility gets punished, sloth gets rewarded. Up is down, black is white.
Yes, there are probably a few people who are getting foreclosed on because of circumstances beyond their control - job loss, health problems, ect. That's unfortunate, but it's something that is part of life, and has happened for a long time, and the government hasn't done anything about it before. Even if we want to bail these people out, randomly picking people whose mortgages are bought at auction isn't the way to do it.
My guess is at least some of the people who get to live rent-free on the government were flippers who flopped or people who lied on their mortgage apps. It's great that these people get rewarded, while honest people who lived within their means don't.
And there is one other reason to not like this proposal. The government has defended the bailout by saying that it could eventually make a profit, by pointing out that the Resolution Trust Corporation made a profit after the Savings and Loan scandal - that the government can buy mortgage-backed securities cheap while the credit market is shaky and resell them when confidence has been restored. Well, part of making a profit is cleaning up portfolios and getting as much out of them as possible. That means moving on foreclosures, on getting deadbeats out of their homes, and the homes resold as quickly as possible for cash. Not foreclosing on non-paying homeowners, and instead letting them live rent-free, is exactly how NOT to make a profit.
The other thing I'm wondering is how transparent the process is - will a homeowner whose mortgage gets sold to the government know that it has been sold? Because if so, this sounds like a disaster waiting to happen. If homeowners know that the government holds their mortgage, and that the government will not foreclose on them if they don't pay, they have every incentive not to pay - why pay if they can live for free?
The next few years are going to be very interesting for the financial and real estate market, and I mean that in a bad way.