Davy Bui

The Government's Subprime 'Bailout' Plan Will Kill the Housing Market

billb - The gov't needs to get the f^&k out of the way and let the housing correction run its course. And hey pal, it looks like I'm advocating a free-market solution unlike most supposed free-marketeers like Kudlow. Obviously, you're too blinded by ideology to "understand my parellel or my spin."

jcrash - Actually the worst borrower is the US government (being the largest debtor in the history of the world). It actually gets the best rates but that's besides the point. Congresswoman Sanchez pointed out that with her 800+ FICO and assets and her job, she could not get a mortgage at the 6% rate listed in the papers.

I haven't done the math but if you took out a $500,000 loan on a house that's now only worth $300,000 and then negatively amortize the reset interest while your rate is "frozen", how will you ever "make out like a bandit?" You're gonna pay hundreds of thousands of dollars of interest alone just on the lost equity. How long do you think it will take that house to get back to $500,000? If the government keeps trying to put in false bottoms, a hell of a long time. You'd need a hyperinflationary scenario to come out of this alive.

Full disclosure: I was a wannabe first-time homebuyer (in Sacramento -- ground zero) around this time last year. The numbers didn't make any sense and now I'm biding my time. I obviously would like to see prices come down more.

The point is that this plan is not aimed at homeowners but rather financial institutions and the markets. Anyone eligible for this should turn it down, go back to renting and start over if they can (I don't know the various bankruptcy/foreclosure laws). In most cases, if you have 3% equity, that will be wiped out by the 5-25% drop in prices yet to come. In the meantime, these people will be paying massive amounts of money on an upside-down asset that's negatively amortizing. All in the name keeping people in their homes but really in trying to stave off balance-sheet reckoning day by keeping as many loans performing as possible.

At this stage, it is too late for a bail-out. This is only the first pass. As the crisis worsens, the bail-out will more fully materialize, complete with taxpayer money.