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

[Rich4REITs]

I can only say that the financial catastrophe will come back with more destruction than expected. This stupid and irresponsible bailout is about to save their, politicians and bankers, asses but nothing else.

[J-Rod]

This article is a breathe of fresh air Mr. Sullivan! I could not agree with you more. Now, if we can just get this article on the President's desk...

[MarineCorpsVet]

This "bail-out" is the most reasonable in my estimation. There will always be someone hurt. This writer is saying, in sum, hurt somebody other than me. (He is not really "hurt" anyway. He's just mad. Just like somebody that bought a stock before it tanked.)
This bailout will hurt the lenders which it should do. Maybe next time that they want to get greedy and talk people into a re-fi so they can get their mortgage loan, they will think twice about it.
On second thought, no. They will be as greedy as a misinformed public will allow them to be.

[Shooter]

Hello Todd,
I agree with you 100%!!! I quess those of us that do are homework are the suckers in this case!But if these people owe federal income taxes there is no help in sight! Mmmmm i wonder why?

[chief66]

This article has no fact basis. He is just emotional (like a woman) because he feels slighted. If you do some research you will find this is not a bail out. Catch a clue.

[long time realtor]

This isn't a bailout. It's a major concession to lenders to show that they are doing something. I would love to have been a fly on the wall listening to the "bankers" pleading their case to the presidential advisors. It helps so few as to be both pitiful and laughable.

[ATLBob]

Your article is absolutely right: the government attempt at a bail-out will tend to reward the irresponsible at the expense of responsible.
Yes, mortgage lenders/bankers who misrepresented terms and conditions to home-buyers need to be harshly punished, although my sense here is that lender misrepresentation and fraud is a relatively small cause of the problem. The primary cause of the problem seems to be those who couldn't really afford the long-term cost of owning a home, but decided to take a gamble and do it anyway. Remember when you learned about the three "C's" of borrowing: Character, Capacity, and Capital? Any buyer who lacked these elements should not have been making a home purchase until their financial position improved. Lenders should not have been offering loans to people who lacked these basics.

Certainly, ARM's have been a terrific way for new buyers to get a home; however, buyers must understand the opportunity cost of electing an ARM vs. a fixed rate loan. A teaser-rate is appropriately named: sooner or later you will be adjusted to a higher rate. If a buyer didn't read or understand the lending contract, they had the responsibility to seek assistance and get clarification BEFORE they signed the legally binding agreement for the largest purchase they are likely to make. Saying that you didn't understand , and crying "it's not my fault" after the fact, isn't a valid reason to receive a bailout.

Those who were successfully flipping property during the housing boom and suddenly found themselves stuck with properties that weren't moving learned what risk and reward is all about. I bet the flippers didn't ask for government assistance while they were making gains hand-over-fist during the boom! The reality is that there always have been and always will be circumstances that cause people to default on their obligations. Borrowers should NEVER borrow more than they can afford to repay, and Lenders must work with borrowers to create a financial repayment blueprint that will avoid a default. This misguided attempt at a government bailout won't stop the defaults, it will only temporarily defer the problem.

[gps_geek]

To those of us, like the author, who did the right thing, (i.e. not getting in over our heads), I propose my own 5 year plan to FREEZE
income tax payments...email Paulson and Bush and tell them you can't afford to pay your taxes now....

[Phil1207]

Agree with you 100%.
This artificial freeze is like giving painkillers to someone with a broken leg.
Instead, you need to fix the leg. It hurts. A lot.
But the patient will be able to walk again.

[the final horseman]

good job...it's about time someone stood up and told the truth. i for one am sick and tired of paying for stupidity and greed.

if these jerks couldnt read...it's their own fault.

if they couldn't count, they shouldn't have bought a house.

if they are house flippers, let them get buried in their own pancake batter.

caveat emptor...no mercy, no pity and no prisoners.

[erx]

Nevermind the details of this particular bailout plan - I suspect that this entire housing/credit bust is going to end up hurting the responsible people most.

A bunch of people are going to be kicked out of houses they should have never been in in the first place. Some may get bailout deals to subsidize them as they continue to live beyond their means. The speculators and bankers who engineered this mess got to pocket a pretty sweet chunk of the gains on the way up. If their
risk management was so bad that they are now blowing up on the way down, maybe they likewise shouldn't be in the banking/speculating business in the first place. Anyway these folks will probably get bailed out too.

As far as 'hurt' vs 'mad', I disagree with JL. If you bought a house in 2006 in the CA county where I live you are almost certainly six figures in the red by now, regardless of how responsible you were in the sense of buying within your means. The point is that there is massive red ink hovering around right now and some of us are going to be eating these losses while others won't be. I'll bet that the folks like Mr. Sullivan, who bought houses responsibly during the past couple of years, are going to end up taking the lions share of this 'hurt', while many of the folks who are most to blame for creating the problem are mostly going to be able to walk away from the losses.

I would go even further and say that bailout plans which lower mortgage rates for demonstrably irresponsible folks, without the same low rates being made available for those who behaved more responsibly, ultimately just amount to a direct transfer of wealth from the responsible to the irresponsible in our society. This is not
just something to be mad about, it should be opposed - with class action lawsuits if necessary.

[GH]

In this entire collection of comments, "User 128342" is the only one who seems to see the situation clearly. Todd, and all the posters who want to play hard-ass, and the ones who sign the anti-bailout petition: do you REALIZE what will happen to home prices - and thus your equity - if all those you wish to toss out of their ill-gotten homes are foreclosed?

First your carefully saved down payment disappears.

Then the remaining equity you've carefully built up disappears.

Now, despite the fact that mortgage rates will drop to the low single digits again:
- you can't re-fi
- you can't get a home equity loan
- you can't sell because the sale price won't cover your remaining mortgage

Gee, tough guy, I hope you don't get laid off when the housing crash causes a severe recession. Because then YOU will lose YOUR carefully paid for house.

Be very very careful what you wish for. Castigate this bailout plan all you want, but make no mistake: it's YOU, and all the other careful prudent buyers of the last few years, that are being protected here.

[cityangel]

This is just sour grapes, pure and simple. The fact of the matter is, you just regret not taking the ARM so you could skate through with a lower rate for the next 5 years.
Wanna walk a mile in my shoes? Okay, good. My husband and I emigrated here 4 years ago (and before anyone starts screaming about illegal immigrants taking jobs..) we moved here legally and I am an American citizen, born and raised. We had very little credit history and because of this a lower score despite paying all of our bills on time. We were paying a fortune renting and had the opportunity to buy a home. We went to see the broker. Yes I questioned him. I wanted to make sure we could cover the payments every month for the life of the loan. He said ' Here, have a 40 year ARM with SLIGHTLY lower rates then you would normally get - 7.45% (yeah I almost robbed them..pfft) and don't worry about the reset, you can refi and get into a 30 year fixed..AND It will increase your credit score. SCORE!! Good decision? No?
Well we thought so and did it, based on the advice we received at the time....we chased the american dream.
2 years later and we've lost 25,000 dollars on the value so we can't refi. Our scores are way up there..but don't do us much good because we have no equity. In July of next year our mortgage is due to increase by $545 a month..and then in Dec 2008 by another $450. This time next year we would be paying another $1000 a month. At this point I should add I have never been late on a payment.
Can we make the payments in July? Who knows..I hope so. I have two kids. I do not want to lose the place we now call home.
We do not live in a mansion. It's a 3 bedroom home. Should we be penalized for wanting to own our own home?
SO for you...you got a 30 yr fixed with a reasonable rate. That is awesome. I wish I had the opportunity to get that. Consider yourself lucky you weren't in a position that made a subprime mortgage your only option.

[Muzie]

You ALWAYS have multiple options. I also immigrated and was faced with the same choice. I rented and invested the remainder and built my credit score over time.

You are not entitled to a house by birth - it is an asset you purchase with borrowed money, and if you borrow the money knowing full well you will not have the capacity to repay the money later on, you are being deceitful with yourself and the lender.

You are not being penalized for wanting a home. But houses are in finite supply, and by occupying a home you cannot afford you are reducing supply and driving up prices for those that can.

[cityangel]

I would imagine very few people borrow money they know full well they do not have the capacity to pay back.
Our earning capacity is in 6 digits (and as such we probably won't be eligible for the 'bailout' anyway) and we live in a nice but modest 3 bedroom home. We did not purchase a house out of our realm of affordability. We could not qualify for a 30 year fixed and rather than throw our money to the wind, we decided (based on information we received from mortgage!! brokers) to purchase and refi when our scores increased. Not realizing it would all go to hell in a handbasket. In fact I asked that very question. What if house prices go down? He laughed and said 'That won't happen'.
I agree that people who inflated their earnings on paper or purchased houses they truly could not afford should not be rewarded for their irresponsibility. However, not everyone falls into that category.

[todd su]

"luck" has nothing to do with it. you made, unfortunately a really poor decision......

[cityangel]

A poor decision that didn't come to light until the housing market belly flopped. A poor decision based SOLELY on information received by the people WE PAID to help us make that POOR decision. I did ask questions. I am an intelligent woman and not prone to being sucked in by snake salesman but I am not qualified in the intricacies of Mortgages and I am not a financial guru, just an average American wanting my family to be healthy happy and secure.
When I am sick, I go to the doctors. I believe what the Doctor tells me. When my car needs fixing, I go to a mechanic and I believe what the mechanic tells me. When I need a mortgage I go to a mortgage broker/Bank and I BELIEVE what they tell me. This is why we have people in those positions.
You are so busy pissing and moaning 'WAA BUT it's YOUR fault' that you refuse to see that there may be genuine cases of hardship that people could not foresee.
None of this is good. You talk about bailouts but I don't see it that way. I see the government stepping in to minimize the damage all of this could cause. I should say 'the Mortgage companies' caused. It may not work. The plan is too restricted and will really only help a handful of people. The fact that it is also voluntary puts mortgage companies in the position of being able to say no..and excuse my cynicism but I find it hard to believe they will be willing to help someone who is currently up to date with their payments. I would imagine that people will have to jump thru so many hoops to get the 'Bailout' it will be damn near impossible. When I called my mortgage company to get more details, they told me they didn't know anything yet. I asked if they would be willing to do a straight conversion to a 30 year fixed, she said she didn't know I would have to talk to the ReFi dept. When I asked to be put thru, she said they didn't have it set up (???) and I would have to call back next week. Already hoops and they don't even know my situation yet.
So dude...it's not like we're laying back suckin on Mai Tai's over here. This is a genuine concern for many families...and really it ISN'T Personal..sheesh

[aksahy]

cityangel,

With all due empathy towards your adverse situation.

If your car mechanic or doctor ill advises then you have the courts for recourse; similarly if your mortgage broker ill advised you then you approach the court.

By advocating govt bailout, or whatever you want to call it, you are seeking govt support to keep your "wanting my family to be healthy happy and secure" at the expense of my "wanting my family to be healthy happy and secure." and my tax dollars. You are demanding my family's exclusion from homeownership as govt bail out sustained house price is beyond median income affordability. You are forcing my kids to go to worse school and get worse education than what they would get with my affordability if you hadn't made the mistake of bidding more than the house is worth.

So please i am bereft of any sympathies for others' miseries because of their misjudgements, I have been patient and responsible to avoid getting my family into a mess that was sustained by irrational buyers. Dont ask my family to suffer further more and pay you in tax dollars as a bonus.

[FSOinHouston]

Excellent post!

[FSOinHouston]

Patience and resposibility! Whatta concept!!

[DawnIsis]

<blockquote>When I am sick, I go to the doctors. I believe what the Doctor tells me. When my car needs fixing, I go to a mechanic and I believe what the mechanic tells me. When I need a mortgage I go to a mortgage broker/Bank and I BELIEVE what they tell me.</blockquote>

This statement reflects a total lack of responsibility for yourself and your family (sincerely hoping you have no children yet). Responsible people do not accept and rely on the judgement of others, regardless of their expertise. You CONSULT with these professionals in order to make informed decisions about your situation. You do not just swallow pills and get surgery based on what your dr. says, you go home and research and research and research and then you get a second opinion, then and ONLY then do you make a decision.

The same is true for every life situation. Your ability to think and reason is the deciding factor to your life's outcome and your happiness. Don't blindly do what anyone advises EVER.

[TooPac]

Think risk/reward. 3 year arm was a far greater risk it didn't necessarily have to end this way for those with ARMs.

You took the safe investment path. Stop complaining.

[sign the petition]

Tax Payers Against a Wall Street and Mortgage Bailout

www.petitiononline.com...?

[Cardinal2007]

He has every right to complain, there is an inherent risk in ARMs, but the administration has gone through a lot of effort to make sure those that took this risk will not face the downside to taking this risk.

If you went to a casino and hit on 14 and got an 8 you wouldn't ask for a bailout, their was a 7/13 chance of getting a card that would double your investment, and a 6/13 chance that it wouldn't work out. This is like getting the 8 and then the casino manager coming up to you and saying don't worry, you can take your chips back. If this happened enough times you know that getting a 22 is just going to get you your chips back and you will be more likely to gamble again. There is a big inherent risk for the economy in rewarding risk this way.

And trust me the next time there is a housing boom I will bet you $100 some Realtor will use the line that even if you can't pay the higher interest rate after reset the bank will just "freeze" your rates until you can.

[KayLaw]

Why does the writer refer to this plan as Paulson's and Hillary's? It's Paulson's and Bush's, correct?

[User 128487]

Yeah. I don't get it either. Why pick out Hillary? Not Bush?

[todd su]

hillary took credit for it today on CNBC. she claimed she proposed it "months ago"

a chip off the ole' bill block

[aksahy]

Hilary claims paulson stole the idea from her and should have been in place a couple of months back. Every party is coming out with similar plan...liberals are just notching it up another level now demanding across the board rate freeze.

[paymyownway]

I must have been taught differently because I am sure not with the "American Way" by living beyond my means, buying what I cannot afford and wanting someone else to pay for it. Perhaps our country has done this to ourselves by all of the hefty government programs that give for nothing and those that believe in socialism are just pushing the envelope. - what now? a WIC card for mortgages??

[taison]

"My question to Hillary and Paulson is" ?? Why question Hillary?? Why not question George Bush?

[taison]

"My question to Hillary and Paulson is" ?? Why question Hillary?? Why not question George Bush?

[User 128536]

Why all the hysteria? How many of you actually understand the agreement? First, it is voluntary. In fact, two of the ten largest mortgage loan companies are choosing not to participate. Second, as I understand it there is no absolute assertion that the other eight companies must abide by the agreement. Third, it only applies to sub-prime 2/28 & 3/27 ARMs. Fourth, only if the lendee is up-to-date with payments. Fifth, does not apply to investors (I assume only homeowners living in their homes).

It is hard to imagine how for the multitude of cases, this is also not in the best interest of the mortgage companies and bond investors. Mortgage companies wrote categories of loans that were very risky. Perhaps they didn't fully understand the risks, or perhaps they didn't care because they generated fees and dumped the mortgages. Investors, due to the desire for higher returns, bought up the bonds.

Well, now, those risky loans have come home to roost. The agreement means that mortgage companies and bond investors are seeking a systematic way of reducing their returns. In turn, for reducing their returns, they avoid uncertain losses (perhaps much larger than anyone had ever imagined), they maintain a possibility of recouping those looses with re-negoitiated loans in the future, and they perhaps help to keep the economy from falling into recession. The losses on these mortgages would be far greater in an economic recession.

And to Todd, enjoy your home and your payment certainty. This has not been forced on anybody. Neither was your home purchase nor your mortgage. But the agreement really has nothing to do with you. It is a logical way for mortgage companies and bond investors to maximize their returns. Yes, it may not be what they initially had expected. But hey that's capitalism.

[aksahy]

Even a non govt aided agreement between lender and borrower to freeze the rate is anti free market and provides enough room for anti trust and monopoly accusations. Some people made prudent decisions to forego immediate gratification with the assumption that free markets will bring down the housing prices. Now the basic free market pillar of contractual obligation is being compromised.

[talkingdog]

Let's see.....I want to buy a house. I go to the bank and even though, quite possibly, I've never taken out a loan before, they make me an outrageous offer, they don't ask any questions and they don't even need any proof that I've got a job.

Since I've never done this before, I may not think this is exactly how it's supposed to go, but since I don't know for sure, I don't question it.

Painting every borrower as irresponsible is, frankly, just as ignorant as blaming every drone in the lending bank who was threatened with losing their job if they didn't meet their lending quota for the month (Yes, some lending institutions now have a quota of loans per month workers have to meet)

Hmmm...who does that leave? Who could have POSSIBLY overseen the lending practices and procedures going on to make sure this kind of thing didn't happen? Whoooooo????

Oh. That's right, the Freakin' BOSS, that's who. The CEOs of the institutions and the Presidents of the banks.

Nobody has explained how this is going to take money out of my pocket...(well, except for indirectly helping to wipe out the entire western economy, because the Big Banker's CAN'T be losing money now can they? Instead, they'll pass the buck or low interest loan buck to be more precise, on to me.) So until that happens, I'm pissed off at the guys who are to blame.

The Fools on the Hill can cut funding to feed Women, Infants and Children. They can keep poor kids from getting basic health insurance. They can set up useless, ineffective programs, (which will only end up helping a few thousand borrowers) for those taking out loans which can't be repaid due to usurious interest rate increases. But their money-buddies, who were supposed to profit from this little blood-off-the-backs of-the-poor-and-ignora... scheme can't possibly suffer for the results of their actions. Corporate welfare for some, bread and puppet circuses for the rest! Yay!

If corporate responsiblity is too difficult a concept to follow, try thinking about it this way: If I go to a Dr. and tell him I think I need medications and without any examination whatsoever, he helpfully writes me up a stack of 'scrips without explaining the ramifications of getting them all filled and taking all the meds at one time...well, yes, stupid, but on the other hand the AUTHORITY in this case, is practicing malfeasance. It is the AUTHORITY'S job and their duty to explain the process and the potential harm to the uneducated or inexperienced (or unintelligent).

There is a reason stupidity is not illegal but MALFEASANCE is. People are born with varying degrees of intelligence. They are able to use that intelligence to varying degrees of effectiveness. You can't legislate an inborn trait, because there is no way to control it.

Malfeasance, on the other hand, is a controllable, willful and fully conscious disregard for potentially harmful outcomes.

Yours is a typical adolescent Con/NeoCon knee-jerk "ME! ME! ME!" reaction without actually examining or giving critical thought to the situation as it exists in praxis.

Yes, it would be nice if everyone were equally intelligent and capable. The hard truth is: that will never be the case. If we don't want our society or our economy (if that's all you care about) ruined, we have to police companies, corporations and people who prey on the unwitting stupidity of others. Because as some of us already knew and many are finding out, it doesn't just affect the idiots making the mistake, it ends up affecting everyone in kind.

And Todd, if by chance you catch your girlfriend screwing around because she "forgot" to mention she was in a relationship, the Other Guy who didn't know all the details is not to blame. Just so we're clear on the concept.

[goforth]

Well said talkingdog! If we take the Todd and friends approach I see no choice but to require potential home buyers to pass an examination demonstrating a level of compentancy in real estate, financing, mortgage contracts, escrow, as well as state and federal regulations. They should also be required to obtain an analysis from a registered financiial advisor, and a legal opinon from a real estate attorney. At that point the potential buyer would be on more equal footing with the lenders, and responsible for mistake or poor judgement in the purchace, which would satisfy Todd. It must be so ego satisfying for some people to feel superior to millions of familys facing default and eviction, as so greedy or stupid they deserve no assistance, not even from the financial institutions that knowingly sucked them in and made billions of dollars in fees and commissions in the process. Give me a break. If the banks had any standards except greed, and "just said no" more often, we would not be in this having this discussion.

[todd su]

so the argument is "the bank's made them do