CNBC reporter Rick Santelli made an on-air statement the other day that irked the White House. The statement was in response to the solution to the mortgage crisis that President Obama announced this week.
Mr. Santelli was reporting from the floor of the Chicago Mercantile Exchange and said, “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills- raise their hands? President Obama are you listening?”. The traders on the floor responded loudly with boos. Then Mr. Santelli called for a Chicago Tea Party in July.
I have to both agree and disagree with Mr. Santelli due to the complex nature of the problem. No one wants to pay for bills that were not incurred by them- so why should we accept the President’s solution for every American to pay for this mortgage bailout package? Well, the answer is not so simple. Had the banks realized, as I did several years ago, that this crisis would be rather significant, perhaps they would have cut back their risk and not offered mortgages to those that were unqualified or not offered products that were extremely risky. The reality is that they didn’t realize this fact- and they didn’t realize that this was not business as usual.
In fact, I told many people 3 years ago that if the banks did not stem the tide of coming foreclosures, it would just spread like wildfire to good, hardworking responsible people- through job losses and rapid deterioration of the value of their own homes. If just one or two homes in a neighborhood are foreclosed on- no one realistically thinks that it will significantly impact the value of their home, but that is not what is occurring right now in most neighborhoods throughout the country. Now the banks have foreclosed on so many homes in some neighborhoods that the good, hardworking, responsible owner now has a home that is no longer worth a fraction of what it was just a few years ago- and perhaps even less than what they owe on their mortgage. After all, if you have 10 homes on a block, and 4 have been foreclosed on, wouldn’t you be reluctant to buy a home on that block? Perhaps if the price was low enough- you might consider it - but that is just my point. Some neighborhoods have been affected so badly and are so abandoned that some wildlife is starting to encroach – such as coyotes and bobcats (seriously! - a reporter from California captured this on video).
What if Rick Santelli was that responsible borrower and his neighbors weren’t? If I was living in his home I would want some help to come to my neighbor’s aid. Because one way or another, Rick is going to have to pay for this; whether it’s in the form of taxes via the stimulus packages or whether the cost is a bit more hidden, when it comes time to sell his home - with a strong possibility that it would sell at a loss or at stagnant prices for a long time out into the future. Either way, Rick is paying for his neighbor’s problems. Now personally, if I realized I was going to have to pay for this regardless of whether it’s from tax money or out of the sale of my home- I would rather pay for it via tax money. Why? The answer is simple…if you keep people in their homes it will stop home prices from freefalling. The other answer is also simple- would you want to live on a block with lots of abandoned foreclosed homes? I know I wouldn’t.
Rick also made the point that even if you brought the mortgage to negative two percent (which was an exaggeration because the bank would be paying you to have a mortgage), people still couldn’t afford to keep their homes. On this point I have to agree, but this is also the reason why the banks must be willing to cut principal amounts and take some responsibility for the lousy loans that they made. After all, what good is it for the bank to own the property if they can’t sell it unless it’s a loss anyway? More importantly, this whole crisis began because banks made lousy loans. JP Morgan Chase (NYSE:JPM) CEO was interviewed by CNBC shortly after the housing plan was announced and he called the plan elegant. When the reporter asked if the bank planned on giving principal reductions, the answer was a flat out no, that reductions in interest rates would be sufficient. I realize he is trying to calm his shareholders, but after that, I wouldn’t be surprised if they suffer more pain by refusing to cut principal amounts.
Foreclosure creates chaos for the homeowner, the bank and the community- particularly acute during periods like now when the banks are foreclosing on entire communities at a time. The economy has deteriorated to a point where simply fixing the mortgage problem won’t be enough – but action did need to be taken. I feel the stimulus bill was not bold enough, but I applaud our government for moving in the right direction.