Feb102012

US taxpayers about bail out California HELOC abusers

I found a new hero online: Steven Greenhut, vice president of journalism at the Franklin Center for Government and Public Integrity. As a fellow displaced Midwesterner, he was shocked and appalled at what he witnessed moving to California. He too is buying up rental homes in beaten down markets for the cashflow. He recently wrote an editorial on Bloomberg that is today’s featured article.

Mortgage Deal Props Up California House of Cards: Steven Greenhut

By Steven Greenhut Feb 9, 2012 8:06 AM PT

Why should a taxpayer in Houston or Wichita bail out irresponsible California homeowners, banks and the state’s public employees’ retirement fund?

Why should anyone bail out California loan owners? Why should anyone bail out the fools who funded the Ponzi scheme? Using government funds to bail out parties to a private transaction is an outrage laden with moral hazard. Both parties to the transaction will be emboldened to repeat the same mistakes in the future. Why wouldn’t they? They were bailed out for their idiocy last time.

Let’s be honest about what this is. It’s theft, pure and simple. Loan owners and banks are reaching into the wallets of every American and taking money to cover the losses lenders and loan owners should endure. I was not a party to their transaction, yet I am paying their bill. And for what? What greater societal good comes from this? Instead of a long-term investment or other beneficial use, these dollars promote moral hazard and ensure long-term societal problems.

Yet that’s exactly what the Obama administration is looking to do in its latest effort to shore up a housing market that continues to sag as large percentages of Americans remain underwater in their mortgages.

The administration is pleased that California’s attorney general is now on board with the president’s multibillion-dollar bank settlement after securing tougher measures to benefit individual homeowners.

More good California-based news for President Barack Obama: Bank of America Corp. has become the first large mortgage provider in the Golden State to take part in a federally funded “Keep Your Home” program that would pay banks to reduce the balances that struggling California homeowners owe them.

Keep Your Home? What a joke. They mean Keep The Bank’s Home at taxpayer expense. People who are underwater don’t own a home, they own a loan. They rent money from a bank to keep occupying a house. If they leave the property, they have nothing, just like a renter. Well, actually, renters have it better because when they leave, they retain good credit. Underwater loan owners leave with no money and bad credit.

Unfortunately, the federal mortgage-relief plan and the California foreclosure-aid fund are based on the same deep misunderstanding about the cause of the housing bust that led to many of the problems in the first place — problems that were particularly pronounced in California because some policies here were worse than elsewhere. Greedy unregulated banks acted like drug pushers by enticing people to take on more debt than they could afford, the Obama administration thinking goes. This view is deeply flawed.

Actually, that view is right on. Greedy unregulated banks did act like drug pushers enticing people to take on more debt than they could afford. And like most drug addicts, HELOC addicts were willing participants who could have made other choices. Banks and borrowers were both responsible for their actions, and both should pay a heavy price for their foolishness. Lenders should pay a bigger price because lenders are more culpable than borrowers.

Houses as Casinos 

… After the bubble burst, I recall asking a friend where all the money went as million-dollar tract houses lost half their value. He laughed, and pointed to his new RV — a reminder of how prevalent it was for Californians to view their quickly appreciating houses as piggy banks. No doubt, predatory lenders engaged in fraudulent practices during the price run-up, but there’s much more to this story than that storyline.

And for quite a while, I was the only one writing about what borrowers were doing with that money. Most viewed the loans as free money they would never have to repay. At some level they knew the debt would be paid off, but that was going to be the responsibility of the person who bought their house years in the future once they had drained every last penny of equity from the property. In other words, they weren’t going to have to pay the debt off, someone else would.

Endless debt service is a cultural pathology in California. The debts are so large most borrowers have no hope of paying it off, so they try to service it long enough to find some poor sap to pay it off for them. Well, they found their patsy: the US taxpayer.

Within months of moving from Ohio to Southern California in 1998, I noticed that home prices were rising rapidly and buyers were getting frenzied. We got out of our lease early, fearful that we would be relegated to permanent-renter status, and bought an aging $200,000 tract house. Within five years, homes like ours were selling for about $650,000.

It seemed as if everyone was refinancing, doing cash-outs, remodeling their places, buying new cars and taking Hawaiian vacations. Water-cooler conversations at work often revolved around discussions of “You’ll never guess what my house is worth.” After the crash, the same people have turned into victims, who apparently had no idea what they were doing and were preyed upon by banks. …

Most people will dodge personal responsibility if they can. Loan owners never felt responsible for the debts they were taking on, so it should be expected they would portray themselves as victims deserving a bailout. The same arrogant asses who boasted about their financial acumen with real estate investments have the audacity to demand bailouts when their arrogance is revealed for the ignorance it was.

Jobs Come First

…. Instead, we get proposals to help homeowners refinance their mortgages even though they have no equity in their homes, something that might save them a little money each month, but won’t do anything to solve the real problem of owning a home that is worth less than the mortgage.

The Obama administration has argued that the economy won’t revive until the home market is fixed, but the opposite is true.

Our policy makers all suffer from the same delusion. They put the cart before the horse. The housing market will improve when the economy improves and people go back to work. Homebuilding will not be the engine of economic recover, not from this recession.

I own two rental houses in the Central Valley, purchased for about 25 percent of their prices at the height of the market. They receive rents that are about double the total cost of the monthly payments, yet there is an abundance of homes like this available. People aren’t buying them because they don’t have jobs and because the government rules now make it too tough to get the credit to purchase them.

Instead of bailing out bad behavior from banks and consumers, it’s time for policy makers to let the market work — in lending, land use and economic policy. In discussing the Obama mortgage proposal, USA Today opined this week that the Republican Party’s challenge is “to come up with an alternative that goes beyond simply saying no.” But saying no is exactly what the nation needs now, especially if yes means another bailout for imprudent Californians.

Most people incorrectly believe government must do something, anything, and that will somehow fix the economy and the housing market. The truth is the government has continued to delay the recovery by its constant meddling in the markets. The markets have been slowly healing because gridlock in Washington has prevented all manner of stupid policies from getting passed.

California loan owners do not need a bailout. They took enough handouts of free money during the housing bubble.

Ignorant Comments

I am spoiled by the high quality of the thoughtful remarks on this blog. I am reminded of this whenever I read the ignorant drivel on other sites. The comments on the featured article were quite interesting.

“Why should a taxpayer in Houston or Wichita bail out irresponsible California homeowners, banks and
the state’s public employees’ retirement fund? ”

Take a look at how much federal tax is paid by Californians and how much federal funding comes back to the state.  The taxpayers of CA have a pretty huge “receivable” of excess taxes paid versus funding received.

California taxpayers do pay much more in federal taxes than other states. That doesn’t entitle California loan owners to free money. If they want to give California renters the same financial benefits proposed to go to California loan owners, then the above argument might be more persuasive.

If people took money out, some bank some mortgage leander approved it based off the same greedy practices they were using then…if the banks and lenders had not been so damn greedy and started this whole mess I would have not I wopuld not hae qualified for my load, as well as others so now theythe rules need to modified to level the playing field for those of us ripped off by our lenders…

Notice how the greed of lenders exonerates this victim of all responsibility. The rationalizations people come up with are astounding.

You don’t get it. The people that cannot now or never could afford real estate are gone. They went *poof* with the first wave of foreclosures. Those left are the people who are still trying to pay their mortgages. We will all be better off if something is done to allow them to be able to do that. Avoiding the dumping into the market of more foreclosures is a positive.

Notice how this jackass justifies his bailout. He was obviously a fool clinging to false hope and praying a government bailout will cause prices to go up and give him equity again.

The banks have been bailed out and accepted zero responsibility  thusfar. Time for them to help out the homeowners, just like they were helped out.

They got theirs, so I want mine, right? Another weak rationalization of why he deserves free money from my pocket.

Remember the tech bubble?  Me, and millions like me, got into it for the same reason why people got into real estate.  We knew nothing about it, but the market was sky rocketing.  We made an obscene amount of money, on paper.  Did we quit?  No, why would you want to quit when your asset increases in value every day?  But in the end, it was a mirage.  It was only worth whatever the next biggest idiot wanted to pay for it.  It was a good idea blown totally out of proportion.

Whose fault was that?  It was my fault.  I was the one that was greedy.  I didn’t ask for my money back, and no one offered it to me.

Maybe the banks can work out a couple of deals with some of the folks on the edge.  I might even offer to help renegotiate some ARMs.  But I see no reason to pay for any of this.

The banks should not have lent the money, and the owners should not have borrowed it.  Let the owners walk away with nothing but good credit, and let the bank write down the value of the foreclosed homes to market value.

Some people get it.