15 Feb 2008 cinamod   » (Master)

I'd like to second Rob's assessment of Senator Clinton's proposed "subprime" mortgage fixes.

I bought in a little bit after the bubble had started to burst. Luckily, I was smart enough to seek out a relatively low fixed-rate mortgage that was affordable (my mortgage costs me less than what I was paying in rent, before considering interest-related tax deductions).

I deeply sympathize with the people who were misled into thinking that they could afford their adjustable-rate, sub-prime mortgages. In a lot of ways, I'm a bleeding-heart liberal, and I can't stomach the thought of millions being kicked out of their homes. Especially those who were tricked into thinking that they could afford the houses they bought.

Whether these "let's bail people people out" plans might be what's best for the country, I can't say for sure. What I do know is that it hurts those people who were betting against the mortgage market. It engenders animosity in me, a fixed-rate borrower, toward people getting off easy on their sub-prime ARMs. And, simply put, plans like this one reward foolishness.

Rob's right - Mrs. Clinton's proposal is heavily biased toward borrowers. Without a doubt, borrowers acted irresponsibly, and should be made to see the error of their ways. But I can't feel bad for the originators. For over a half-decade, they handed out sub-prime loans like they were candy. No credit or proof of employment? No money down? No problem. Here's $400 grand. Enjoy your "jumbo" no-doc loan.

These originators knowingly acted irresponsibly, and shouldn't be surprised when the houses they've foreclosed on are worth less than the loans they issued. It was the originators who should've known that these people couldn't afford their loans. It was the originators who should've more accurately appraised the housing assets they were purchasing. And it was the originators who shopped around for underwriting companies to classify these untold sub-prime loans as "good debt", so that they could sell slice, dice, repackage, and re-sell them to mutual funds. Their irresponsible lending practices directly caused the bubble that's come back to bite them.

What Rob misses is that the lenders are going to get "short-changed" anyway, and rightly so. They should have had no reasonable expectation that the majority of these loans would pay out at the higher, adjustable rate. Their option isn't between getting the higher rate vs. the teaser rate, because millions of people are defaulting just as soon as they hit the higher rate. Their choice is between getting the teaser rate vs. what they'd get from selling a foreclosed property that's worth far less than the loan they originated. But maybe the market should be left to its own devices to decide what return these lenders should get on their investments.

And since we're talking about bail-out plans, it's worth mentioning that the lending institutions already got a bail-out in the form of a enormous cash injection, lowered interest rates, and new federal underwriting rules which allow the feds to buy bigger loans from these lenders, thus passing the debt and risk from the lenders onto the taxpayers.

The people who are really getting screwed are the ones who own this repackaged "good debt" in investments like mutual funds and responsible people who might legitimately need a loan to start a business or purchase a car, but can't get one at a reasonable rate due to the "credit crunch". And there's no plan out there to help us.

At the end of the day, the irresponsible originators get a big bail-out. It looks like irresponsible home-owners are about to get one too. And it looks like responsible people like me get a weakened dollar and a big drop in their mutual funds' value. Enjoy.

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