Monday, October 6, 2008

Adjusting Principal Principles

I will be voting for the Obama/Biden ticket come election day, but I am not so sure about this statement by Joe Biden:

"Number two, with regard to bankruptcy now, Gwen, what we should be doing now -- and Barack Obama and I support it -- we should be allowing bankruptcy courts to be able to re-adjust not just the interest rate you're paying on your mortgage to be able to stay in your home, but be able to adjust the principal that you owe, the principal that you owe."

I am all in favor of helping people who need help, including food stamps and (non-permanent) welfare. But when someone else gets food stamps or welfare, it does not decrease the value of my assets. It is also nearly impossible to be a welfare speculator (despite the Reaganian myths about that). This leads to an entirely different situation with welfare and food stamps than with a housing bailout of this type.

Speculative purchasing underwritten with highly leveraged purchasing is a big part of this situation, as are people who cashed-out equity on existing homes (another form of speculation). Too many people who are in a foreclosure situation did this (rather than, say, being in foreclosure because they lost their jobs but had previously behaved responsibly).

If their principal is lowered by 10%, that lowers the value of their home by at least 10%, and given the scale of the situation, all homes will fall in value by at least 10%. I'll have just been charged an additional 10% of the value of my home, compounded over length of my mortgage, for the bailout. Bankruptcy is about to become too common, so this will become a somewhat widespread problem -- the issue is that in order to keep people out of foreclosure they will be pushed into bankruptcy.

Of course, if the government doesn't do what Biden suggests, the foreclosures will force down the value of my home even farther. Bankruptcy at least allows restructuring, mass foreclosures are a market crash. I understand that, but what proviso is there for the bailed-out to pay me back (by paying the Treasury back over time, and thus I can get paid back in lower taxes /
tax incentives for non-bailed-out homeowners)? Would there be different rates (or a cancellation of) the income tax mortgage write-off for bailed-out consumers? I think something like that is in order.

Bankruptcy restructuring protects other debtors, so I think the treasury should also become a de-facto debtor to the tune of the ten percent principal and any interest they assume (through buying and adjusting the mortgage). The mortgage becomes affordable, but the bailed-out do not double-dip by then also getting tax credits (until their bailout is paid off).

Also, is it part of the plan, to prevent speculators from profiting from bailouts, to have a cap of one on numbers of homes per person, and extent of leverage, in terms of who is qualified for bailout underwriting? I sure hope so.

Sorry to say, but some people on main street did get greedy. Not everyone was an innocent victim of predatory lending (and some who were became victims because they let short-term greed get the better of them). Speculation was rampant, even among amateurs. House-flipping was rampant, even amongst people who lived in their own homes. I saw it. I read about it. And everyone was told they needed to get into an expensive home because prices would just go up and up and then they'd be house-rich, and everyone would get a piece of the pie.

Everyone did want a piece of that pie. People very often talked about making a profit off their homes, and not always long-term. This market psychology is exactly how bubbles happen. It doesn't make these homeowners evil, villainous scoundrels, or even retards, but they did make mistakes. Problems with "the system" include actions taken by more than just a few people. Systemic problems come from the actions of many. Those actions likely stemmed from bad information circulating about various elements of the market, and were egged-on by wealthier, perhaps greedier players in the market, but the buyers are not guilt-free.

Wall St. made the bigger mistake -- by huge margins -- but Main St. was buying into the bad instruments and bubble fervor. Main St. greed allowed a stable, major asset class (home real estate) to become entangled with Wall St. greed and sketchy practices (like CDSes). It was because of this speculation mania that Wall St. had enough subprime mortgages to bundle into other financial instruments in the first place.

I sure don't think the people who behaved fraudulently, or unethically, in the big institutions should get off -- they should be arrested and/or fined heavily if what they did was illegal, prevented from profiting directly from taxpayer bailout dollars, and fired if what they did was legal or quasilegal but unethical. They caused the major problems in the economy, by far, and those big guys should pay back first and most.

However, if we're all going to bail-out the overextended individual borrowers, then the government should also make them responsible for paying back the treasury. Everyone who is getting bailed-out should be giving the American Taxpayer their money back over time, whether it be in warrants, reduced tax credits, or some other way. Reduced tax credits are probably the least painful. It's not a matter of punishment for punishment's sake, but requiring people take at least some responsibility for the repercussions of their actions.

I'm not generally particularly conservative, but I'm also not in favor of giving busted speculators a free ride on my back, even if they were poorly financed, poorly educated amateurs. Those people I'm willing to cut more slack than the big guys, and would not mind somewhat more generous terms for them, but if they are completely off the hook, that encourages this sort of thing to happen all over again.

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