"Flip" this Bailout

[radhak]

The list of blame in my opinion goes from most to least with sellers owning the most blame.

Oooh No! I think you got that wrong right there! If you mean a seller should be blamed for wanting to get the biggest possible profit, that's a bit Karl Marx-ian.

In any sell/buy situation (non monopolistic, of course), the buyer holds responsibility for the price paid, while the seller is responsible for full disclosure (ie, no false claims).

Anybody who buys a house s/he cannot pay for will have to 'pay for it'; and the agent/appraiser/bank that eggs him/her on is responsible too, but a bit less so. Regulators are only responsible for the rule-of-the-law, and maybe for sleeping on the job.

In this whole scenario, the party with least blame is the seller. Your list should read least to most, and the seller should not even figure in it.

[rcp612]

My question is,,, Are the banks going to have to re-write mortgages for those people who had "interest only" mortgages?
They apparently were only speculating and never had any intentions of paying for their property so, why should everyone be looking out for their best interests now?

[bruce hylton]

Free enterprise is great, The current system has deviated away from that a little bit. At least the bankers know how to 'adjust' their pay schedule to make money.[4 times as much when taxpayer money is being used, makes it easier to make a profit]Ever hear of Robin Hood?

[cgallery]

There is one person that deserves more blame than anyone else.

Alan Greenspan.

Greenspan had an opportunity to utter the words, "an unsustainable bubble has emerged in housing, and the board of governors is exploring options for piercing it."

The Fed's bias was to just watch bubbles grow and pop. I actually communicated with Greenspan over this after the tech bubble. I implored him to change the Fed's policy to be more pro-active on bubbles.

He now admits that the Fed needs to change their bias. Well duh.

It took the largest freekin' bubble that could have ever been formed for him to see the light. And he isn't running the FR any longer, so we can only hope that current leadership (if we can pull out of this--it ain't over) will respond more reasonably in the future.

[germdoc]

Boy are we all getting a crash course in the dismal science right now.

Wish we could study something else instead...

[pierhogunn]

+2 on os1kne/Bill's point as to the meddling by the government, As a current employee of one of the bigger banks ( that bought a failing mortgage company and lost our CEO over it) I must say that the government's pressure, brought under the Clinton Administration, to pour money all over the place where there was extreme risk of default made serveral things possible

and now for dan's train of blame

1. I blame our federal government for pushing our lending institutions for making debt so easy to obtain for anyone with a pulse, with no real regard for repayment. ( community reinvestment programs, great for many at the beginning, disastrous in the long term)
2. I blame our Lending institutions for being blinded for being so caviler in the issuing of all of this debt, with no real regard for recovery
3. I blame the feds for bending to the will of the lending institutions for relaxing the reserver requirements on these "banks" so that they could continue following the lead of the feds to make more money available
4. I blame the shareholders in these banks for developing an unreasonable expectation that banks can for any extended length of time provide a double digit return on investment


and now, back to updating my resume...

[cabinetman]

I gotta agree with UC. Where the money goes is really inconsequential. For years I had clients that made good livings off of flipping homes. So did I. So did a lot of working tradesmen who supported their families and spread the money back out into society. The suppliers of goods for those services also benefited. It produced jobs, enabled sole proprietorship in many instances, and it upgraded homes and neighborhoods. Did we forget about that?

The blame as I see it was the greed, dishonesty and downright illegal practices performed by all involved in lying on forms, and incorrect credit information. The default process is a risk.
.

[430752]

Wow, an attack on capitalism. Whooda thunk it. Burn at the stake those who make profits. Its like we're back in the 60's, you know: profit is bad. (I wasn't even born until the 70's.). I dunno, I think its just that we're coming full circule and after wanton greed, excess, corruption and whatever other financial vices exists from the 80's to 00's, we're learning that while not all profit is bad, much profit, and generally excess profits, are bad.

As far as the Op and the comment that banks didn't make squat off the loans since they don't paid until the loan is repaid, this couldn't be further from the truth and I argue is the exact reason we're in trouble. The banks, for the first time ever, didn't care whether the loan was repaid. They made loans to earn the fees, then bundled the loans up in packs of 100 or 1000 and sold them as collateralized securities (earning another fee perhaps). That is, instead of buying a bond in GE or IBM, you bought a bond in the 2400 block of Chula Vista, California. As one commentator put it, used to be that banks frisked you before they'd give you a mortgage, now they were giving mortgages without even asking anything more than your name and social security number. Why? TO write the paper in order to get the loan fees and bundle the paper up and trade it to someone else in the debt markets. Then making money off the derivitives market on those notes, not to mention the fees on the default credit swaps.

It was all a big money churning machine, with the home seller or buyer, even flippers, being the hamsters on the treadmill making the whole thing revolve.

As far as the feds stoking this machine? Well, in the sense that some congressmen and executive branch elected officers decided to give back to their special interests and repealed several very impt. banking laws and other regulations, yes. But that didn't create this mess, that just permitted it to happen. But, in the sense the fed stoked this mess? No way. sure, affordable housing was pushed, but beyond small areas and limited people. Nahh, this is bigger than that. Frankly, the govt. isn't that skilled or smart to pull off this kind of miracle turned debacle. And the feds don't write mortgage guidelines, they just write certain FMA guidelines for govt backed mortgages a small percentage of the universe, banks are free to use these guidelines as defaults or not (unless writing a govt. back mortgage). So, once banks figured out they could make more money, much more money, by deviating from the fed guidelines, they did. And now we're screwed.

[Gator95]

1. I blame our federal government for pushing our lending institutions for making debt so easy to obtain for anyone with a pulse, with no real regard for repayment.

Not to be overly anti-government, but probably the biggest part of the problem started when the govt. got involved with loosening mortgage lending restrictions in the mid-1990s.

Many more people qualified to borrow much more money and were permitted to buy real state with practically, or exactly, "no money down".

I've heard this argument before, often enough that there must be some truth to it, but still unclear how this actually worked.

1) Exactly how did the federal government 'push' lending institutions into making debt easy? Don't banks decide on their own who they are going to lend to and not lend to- as long as they're not being discriminatory? Not clear exactly how they can be 'pushed' into anything.

(2) What exactly are the mortgage lending restrictions that are being talked about that got reduced in the mid-'90's? Wouldn't any restrictions or rules made up the the federal government only apply to FHA loans? Once again, can't a bank just decide what their loan criteria are?


If I was going to try and highlight the govenments role in the current crisis, I'd say a valid arguement is that the very existance of Fannie Mae, Freddie Mac, and the mortgage interest tax deduction has distorted the US housing market. And also that a GSE that made an implicit guarantee of bundles of loans made by others was a disaster just waiting to happen once they were cut-loose as pseudo-private corporations in the late 60's, a perfect recipie for the privatization of gains and nationalization of losses.

[ragswl4]

Seems to me we should be more interested in making sure that this disaster doesn't happen again. Fix the parts that are broke and improve the oversight on the whole thing. The money that has been lost is exactly that, lost. As far as the flippers go, hey I'm jealous that I didn't get in on it. Buy low, sell high, its the American way of investment. Houses are no different unless its actually your home. There are probably as many flippers that lost their shirt as there are that made money. As I understand it, the Government is not going to assist anyone with any mortgage that is not their primary residence. So all these speculators (read flippers) are out of luck on the bail out. Well that's the risk they took.

[Hellrazor]

The people who flipped the houses and made money are not a fault no matter how much anyone wants to blame them. They didn't force anyone to pay double price for a house, they didn't force the banks to make loans well above peoples means and they didn't file for bancruptcy for over extending themselves. The people who PAID the inflated price, signed for a loan well above what they could afford, the banks themselves, etc are all at fault.

If I buy a HF wrench for $3 on sale and sell it to someone for $15, am I at fault or is the person who was dumb enough to buy it? We live in a free market. If someone is willing to pay the asking price....

[os1kne]

I may have been a couple of years off with the timing, but here's a link to an old New York Times article from 1999, it's an interesting read:

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260

At the time, it didn't seem like too bad of an idea - it just spiraled out of control. Hindsight is 20/20.

Plenty of blame to go around, but that doesn't really matter now.

[Garasaki]

People took bad loans.

Let's blame those that spent something they didn't have and weren't going to get.

I agree with that 100%. It's the lack of responsibility on all levels that got us into this problem.

Now the government is bailing out those who acted irresponsibly. What kind of a message does this send? Make sure those who screwed up don't have to face the consequences? Force the people who made responsible decisions to pay for the mistakes of the irresponsible?

This country needs a good leason in personal accountability. We were just about to get one. Until the government stepped in. Now it seems to me more like encouragement to act fiscally irresponsible.

What particularly burns my chaps is the government buying private sector institutions - funnelling additional power to themselves.

All in all, I think the whole thing stinks. And I'm not sure the blame game really matters - especially the way this government is working.

[JeffG78]

While there are lots of cases where people took on loans they couldn't afford, there are just as many poor suckers that simply got caught up in it.

Here in Michigan, there are lots of people who did it the right way and still got screwed. Just this morning on the radio, a guy called in who bought a house with 42% down four years ago. His house is now worth less than half what he paid for it. The guy is now upside down on a house he put 42% down! With Michigan's unemployment rate being the worst in the country, if he loses his job, he can't even sell the house for what he owes and leave the state.

The only places to pin the blame are the Government for relaxing the lending standards and the mortgage companies for cheating on loans to make sure they get approved. I want to know why real estate appraisers are told the selling price BEFORE they submit their report. They are hired by the bank to appraise a house for X amount. Why bother? Up until after the meltdown, every appraisal came back at exactly the selling price. Hmmm, what a coinky dink...

[ragswl4]

The people who flipped the houses and made money are not a fault no matter how much anyone wants to blame them. They didn't force anyone to pay double price for a house, they didn't force the banks to make loans well above peoples means and they didn't file for bancruptcy for over extending themselves. The people who PAID the inflated price, signed for a loan well above what they could afford, the banks themselves, etc are all at fault.

If I buy a HF wrench for $3 on sale and sell it to someone for $15, am I at fault or is the person who was dumb enough to buy it? We live in a free market. If someone is willing to pay the asking price....

Yep, you got it right. Buyer beware in every case. I don't care what the bank or loan agent said. If you can't look at the documents and the payments and figure out whether you can afford the thing you are buying then you shouldn't be a buyer. Lots of folks in California bought their house, the value went up so they refinanced and took out a bundle of case for who knows what purpose, then the bottom fell out and now they are upside down in the mortgage. Pair that with a sub-prime loan and disaster. Darwinism at work here in a lot of cases. These folks will not get help from the Government as I understand the requirements. If you are more than 10% upside down, no help. Most folks here are out of luck as values in my county are down 30-50% from the high. Glad mines paid for.

I met a fellow on the golf course last week who sold his home 3 years ago for $500,000 and purchased the exact same model 6 months ago for $280,000 on the same golf course. Shame on him.