He had a good article (scroll down to Housing Problems Genuine, Sense of Crisis Phony) earlier in the season saying everything I feel about the people who are losing their homes to foreclosure and the banks that are going bankrupt and the loans that are defaulting: boo-freaking-hoo. be smarter next time. Why should they get a break because they bought a home with nothing down and 100 percent finance when I save for years, and put 20 percent down and suffer because the whole freakin' market takes a hit for these stupid morons? (written in sep 07):
Many of those who bought into the overheated housing market using gimmick instruments such as piggyback loans, in which downpayments were borrowed, put hardly any cash into the purchase -- the home's equity would not have been theirs for years or decades, even if everything went well. In most cases, a person who forfeits a recently purchased home will have paid only a tiny fraction of the appraised value of the property, and thus will suffer relatively small out-of-pocket losses. (The exceptions are speculators who bought on margin and victims of the fraudulent practice known as "equity stripping," but the latter is something done by criminals, not by legitimate mortgage lenders.) Blue-blooded Merrill Lynch is reeling from bad mortgage loans -- it'll need to cut back on caviar in the executive dining room! Pinstriped, made-of-money Citicorp is reeling from bad mortgage loans -- the executives will need to share company-paid private jets to Aruba instead of each taking their own! Some estimates hold that mortgage-loan losses might total $400 billion, almost double the inflation-adjusted cost of the savings and loan losses of the 1980s. But remember, most losses are by lenders, not by individuals who bought homes on credit.
Mortgages based on initially low gimmick loans that are now "resetting" at higher rates are causing genuine grief in the lives of many people. The fact that big-deal credit-rating agencies such as Moody's gave high ratings to bonds backed by subprime or gimmick mortgages reminds us again how much quackery there is at the top of American financial institutions. Former Labor Secretary Robert Reich, whose new book "Supercapitalism" is quite good, explains how the bond-rating agencies essentially operate on commission to investment banking houses, in an arrangement as shady as Enron's deal with its accountants.
What about people who jumped into the hot market from 2002 to 2005 using gimmick loans and might face default? There's no doubt many were snowed by mumbo jumbo from mortgage brokers, and no doubt many never read what they signed. But reading before you sign is, after all, your responsibility -- not a responsibility that should be passed along to fellow taxpayers who did read before they signed. Recent columns and politicians' statements on the mortgage "crisis" have suggested that those who signed gimmick loans, such as interest-only or adjustable-rate loans that are cheap initially but become much more expensive later, really aren't to blame for their own decisions. If you sign something that allows you to live beyond your means for a few years, and seems too good to be true, in what sense are you not responsible for that decision? Last week on a local newscast, I heard a woman who had signed a gimmick loan, and now was in danger of losing her house, say, "The broker told me it was no problem because if interest rates went up, I could just refinance." We would not take seriously someone who said, "The broker told me it was no problem because if interest rates went up, I could find a bar of gold on the sidewalk." If interest rates went up, so would refinancing rates; the way to lock in a low mortgage rate was to buy only what you could afford and sign a conventional fixed loan. People who didn't do that, preferring a promise of something for nothing, are now complaining they should be bailed out.
In this new paper, Anthony Downs of the Brookings Institution gives chapter and verse on why the housing price and credit "crises" are mostly hot air. His summary: "The facts hardly indicate a credit crisis. As of mid-2007, data show that prices of existing homes are not collapsing. Despite large declines in new home production and existing home sales, home prices are only slightly falling overall but are still rising in many markets. Default rates are rising on subprime mortgages, but these mortgages -- which offer loans to borrowers with poor credit at higher interest rates -- form a relatively small part of all mortgage originations. About 87 percent of residential mortgages are not subprime loans. Subprime delinquency rates will most likely rise more in 2008 as mortgages are reset to higher levels as interest-only periods end or adjustable rates are driven upward. Unless the U.S. economy dips dramatically, however, the vast majority of subprime mortgages will be paid. And, because there is no basic shortage of money, investors still have a tremendous amount of financial capital they must put to work somewhere. On the immediate problem of mortgage defaults, some aid to the subprime borrowers might be justified, but bailing out the lenders even more than we have up to now would create a moral hazard by merely encouraging them to do it again."
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