ARM Bailout Unfair to Responsible Borrowers

If we are going to freeze subprime interest rates at their original rate for the next 5 years, I pose the following question:

We bought our house one year ago with a 30 year fixed mortgage. Why? We thought rates were going up and the ARM's that were being offered were 3 year ARM's at about a point lower than ours ended up being. Had we gone with the 3 year ARM at the time, we would have saved just under $200 a month.

My question to Hillary and Paulson is: If you are going to bail out those of us who got in way over their heads or just speculated and lost, what about those of us who made the right decision? Aren't you just stoking the irresponsible behavior that spawned the current situation? Are we going to get a pat on the back for making the right choice?In our case, choosing the ARM and then getting the 5 year freeze the government will be offering would put an additional $14,400 in our pockets. That will teach me to do the right thing.

This is the problem when government steps in the market. They end up screwing those who have done nothing wrong in order to protect those who bought something they either did not understand, could not afford, or gambled and are losing.

I am sorry, but when you become the backstop to irresponsible behavior, instead of solving it you cause it to proliferate. This is like your kid driving like a lunatic despite your constant warnings and then crashing the family car. Do you rush out and buy him a new one? Hell no! Give him or her a bike, tell them to suck it up and buy the next one themselves.

Same with these homeowners. If you bought a house you clearly could not afford just to impress the folks at work, used the low "teaser rate" to get in and either:

A) did not read the document you signed that told you when and by how much the rate would adjust to and what those payments would be,
B) figured the housing market would go up forever and you would eventually have the equity because of that to refi into a better loan (gambling) or
C) neither and "just had to live in that house"

then what is happening to you is just too bad. If you are dumb enough to just roll the dice with the largest single investment you will ever make, then if the dice comes up seven, sorry, but you crap out. There is no reason the rest of us who are responsible both with our spending and the house we bought ought to be forced to subsidize your stupidity. That is not the way this game is supposed to be played. Some win, some lose.

This bailout? We all lose. Why?

These folks will just have the eventuality of foreclosure put off a few years. housing turns like a supertanker. In areas where prices are down 40% to 60% from their peak, it will take the better part of the current decade and well into the next for these folks to have the equity they need the actually refi into a better loan.

You will now have people at the margins, folks who made the right decision but were not really sure about it, deciding that riskier is better. Rather that being satisfied with their decision, they will resent the folks across the street whose rate has been frozen below theirs and will decide "next time, I am doig what they did". Now we proliferate the problem.

The "bailout" and yes, that is exactly what this is, will not solve the problem. Pain and suffering will. As long as people think there is a safety net, they will continue to do the things that get them into this problem. All you are doing is guaranteeing this happens again.

Comments

[DawnIsis:]

After reading the comments I just wanted to add my 2 cents. I am in my late 20's and have been married for 3 years and like most people we "expected" as a married couple we should immediately buy a house, but as soon as we started trying to understand the mortgage process we realized we should remain renters and build our credit scores and save 20% for a down payment.

It has taken us the entire 3 years to do this and we made huge sacrifices to achieve our goals. This is how responsiblity works. BEFORE you apply for a mortgage you read books, ask questions, and do research and IMO you should have at a minimun 10% to put down if not 20% like us.

We have not yet purchased a home because we are waiting for the market to bottom out so that we can get an even better deal. Needless to say I am against this bailout and I feel no pity, in fact I feel contempt for anyone who did not make the sacrifice it takes to own a home THE RIGHT WAY.

I notice alot of people blaming everyone for their problems but themselves, shame on you people.

2007 Dec 09 08:46 AM

[watteau:]

The bailout only subsidizes the overblown housing prices. It is like helping companies cooking the books. It stems itself against the natural flow of the market. Compare the bailout with a blood clot. When will the stroke come? Shouldn't the government get some exercise in financial responsibility instead?

Thanks to Mr. Bush, Mr. Greenspan, and other economic crash pilots, making unreasonable decisions is rewarded, being financially reasonable, punished.

What bailout comes next? Car owners, who can't make their payments? How about a shopping-bailout after Christmas?

It is the ground of any healthy society to punish unreasonable behavior (or at least to not support it) and further reasonable behavior. Mr. Bush is turning the tables on reason. Unfortunately, we all will have to suffer the consequences, even when the Bush government will only be a spotted chapter in the history books.

2007 Dec 10 02:34 AM

[watteau:]

PS: to the posters who consider this bailout not a bailout: don't you think the rate freeze will cost the mortgage companies money? Just because they might be giving in to government pressure, that doesn't mean it is the best solution or them.

And how do you think those costs will be paid for? Exactly. If you, one day, need a loan for your next house, you will be paying for those, who bought a house without being able to afford it.

Not that I have any pity with mortgage companies. Many will crash anyway. But how about those, who acted reasonable? Who balanced their investments?

This bailout plan not only hurts prospective buyers, who will have to pay artificially upheld prices, it will also hurt reasonable companies, who relied on contracts they made, and which are suddenly not worth the paper they were printed on.

2007 Dec 10 02:44 AM

[Mike K.:]

I'm late to the party, but I'd like to add my two cents.

Good job, Todd! I agree with you 100%

I'm afraid this might be a prelude to the bailout of those who lived the high life rather than saving for retirement. Many of those who got into trouble flipping houses, living in houses that were clearly beyond their means or refinancing so that they could spend their phantom equity on luxuries will, undoubtedly, fall into this category. When they realize that they can live the life they've become accustomed to on social security, they'll be looking for Uncle Sam to provide them with supplemental income at the expense of those of us who lived within our means and saved for retirement.

I don't expect this to happen right away, but if this bailout goes through, I expect to see it somewhere down the road.

2008 Jan 22 06:04 PM

[Mike K.:]

Oops! Another good example of why you shouldn't proof read your own work.

Make that: When they realize that they CAN'T live the life they've become accustomed to on social security....

2008 Jan 23 06:44 PM

[Gregory:]

I agree with you, that in principle a bailout is unfair to responsible borrowers. I am myself one of the "responsible" ones; no debt other than my fixed rate mortgage, pay off all credit cards every month. However, as described on blog.finret.com/archiv... there might be some good reasons to reconsider.

2008 Mar 07 09:56 PM

[Christine H...:]

I was JUST saying the same thing to my husband this morning... "What about us? What do we get for paying on time?" OK, we don't have a credit report that will be hit with a foreclosure and we won't have to file for bankruptcy, but it sounds to me like niether will the people getting bailed out. They are being protected... if their house doesn't go into foreclosure, their credit score is not dinged, right?

We signed a 30-year fixed mortgage for 6.5% 3 years ago. Not bad. BUT, if I were in the same boat with the aforementioned people who for whatever reason are now in over their heads, I could probably pause my mortgage payments for 3 months, negotiate for my lender to reduce my principal balance AND get a reduced FIXED rate for around 4% or 5%! Where do I sign up?!?!?

So should I just SAY that I can't pay my mortgage anymore (or just stop paying) and then BEG my lender to make a deal with me?

We tried talking to our lender about getting a better rate, and they made an offer to come down about a quarter of one percent... of course, it would cost us about $5000 to do this.

Maybe I'm crazy, but it sounds to me like those of us who borrowed within our means are the ones getting screwed.

Am I missing something?

2008 Mar 26 04:03 PM

[Todd Sullivan:]

christine,

we are not "getting screwed", we are just not getting "a break".

2008 Mar 27 11:16 AM

[cissdsm:]

I understand that now they are proposing to renegotiate the principal on the home mortgage downward so as to lower the amount of the mortgage. This is on top of forgiving the 20% downpayment piggyback load the buyer had recieved. I know this because two of my neighbors have moved out cause they still can't afford the payments. One of them is a realtor who told me 9 of the homes she sold in our development are all in foreclosure. My wife and I worked and saved to buy our new home without a mortgage. Now it would appear if my neighbors want to stay in our neighborhood they will get a 35% discount on price compared to the one I paid. On top of that I get to pay higher taxes to fund the whole mess.
My wife and I feel foolish again for working hard, saving and investing, and not living beyond our means. Screwed again. My wife asks why didn't we live it up like our neighbors (two vacations per year, new Mercedes, and SUVs, his and hers Hummers) Life is definitely not fair when idiots are rewarded who are the real idiots?

2008 Apr 10 05:05 PM