Thursday, March 25, 2010

Principal Reduction Plans Finally Arriving - Social Acrimony Not Far After

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We often like to talk about 'benefit-benefit' analysis versus 'cost-benefit' analysis.  On Wall Street it's almost always benefit-benefit because almost every 'solution' the US has come up with the past few years to this economic disaster has pulled in benefits with the costs pushed out (onto the public at large) but at a future date.  So we do not "feel" the negatives now, and only enjoy the positives.  Bailouts, handouts, subsidization, easy money, the whole cadre of "good times".

Specific to the housing market we have seen a litany of solutions which frankly are unfair to the "responsible", and reward the not so responsible*.  Thus far the argument to those people has been "if we don't do this, then housing values for everyone will fall".  The reality is housing values still fell, and many of those who made the worst choices are being rewarded.  I won't rehash the progression, we probably have 50 different posts on various programs, handouts, giveaways - ironically a lot of these are as much backdoor bailouts for the banking system as they are benefits for the homeowner.

The ultimate step in the housing 'solution' has been principal reduction - different from interest rate reductions or extending the terms of a mortgage, this is probably has the most "in your face" sense of unfairness.  Do the wrong thing... get principal reduced.  Play by the rules?  No soup for you!  It has to be even more egregious to watch because certainly many of those who played by the rules shook their head as they watched the neighbors do their annual "cash out refinance" to pay off credit cards, take the vacation, buy that SUV, or install the granite countertop.  Their thoughts were "one day they will get their come uppance".  But instead almost all American resources have been devoted to rewarding this group*.  Bank of America has introduced a pilot program yesterday, and I expect the Treasury Department to roll something out in the next few quarters as well - this has been rumored for quite a few months.  

*note - of course some proportion of homeowner receiving benefit today are victims of circumstance i.e. job losses, and did abide by 'the rules'. 

Ironically the BAC program is going to be devoted mostly to helping those who took the most insane loans - the option ARMs.  [Aug 13, 2008: Option ARMs- Who Thought Up these Time Bombs?]  You remember the ones - where not only do you pay no principal but more principal is tacked onto your mortgage each month because you could not even qualify for an interest only mortgage.  i.e. a benefit to the people who truly were not home owners in any way, shape, or form other than on paper.
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Turning back to our 'cost-benefit' analysis I do believe there are many NON financial costs created by the solutions we have taken.  Holding a society together generally is some basic sense of fairness and equity.  Especially in America.  Play by the rules, work hard - get ahead.  I believe this faith has slowly but surely been lost over the past few years.  Not just in seeing how corporations -especially of the financial kind - have been treated & protected, nor how savers have been sacrificed so that debtors can benefit, nor how tax monies are used to protect public workers while private are subject to "the free market", nor how homeowners are catered to while renters are 2nd class citizens - but simply citizen versus citizen.  Social acrimony is on the rise.  I have no way to quantify it, and I don't know all the implications.  But this is one of the reasons I believe the outrage the incumbant politicians are going to see this fall will be massive.   [Mar 17, 2010: 17% Approval Rating for Congress, More than Half of Americans Would Vote Every Member Out]  I do believe the "responsible" people are fed up.... many people are beginning to believe there is no reason to play by the rules, because that places you in the 'sucker' category in America.   What that sort loss of faith in the system does to the long term trajectory of a society... I simply do not know as there is no template to work off of.

Here is a sampling of some 500+ comments from USA Today on the Bank of America pilot program (not the "rich people's paper like the WSJ, or the "liberal" NYT - but the common guy's paper) and I think it reflects the loss of faith in the system and doing the "right" thing.  Which is why this rally, these paper gains, the "recovery" bought and paid for by government spending, a Fed back into full bubble creation mode, a bevy of home "owners" no longer paying mortgages but instead shopping and the like.... is in many ways so short sighted.  Because the true costs (outside of the financial) associated with it on the citizens who have been chugging along, struggling, play by the rules - are not being discussed.

#1

Lets go to court! I have a B of A loan and my house has decreased in value by 30% but I don't owe more than it's worth because of a 40% down payment. So I should get a 30% reduction in my loan amount.
Lets just abuse working America and pander to the banks, politicians, wall street and the folks who made mistakes in borrowing.

Idiots!

#2
 
No need for responsibility anymore folks. A lot of people working two or three minimum wage jobs, just to make ends meet, have got to really be wondering if it's worth it. The parasites and losers who squandered their resources are getting all their needs met. While those out busting their butts are getting the shaft.


#3
 
I'm starting to realize there is no upside to doing what is right, being responsible to your fellow Americans, etc.


Some folks run up outrageous credit card debt, purchase homes they can't afford, etc. And their penalty? They have their debt principals reduced, their rates reset to lower rates, they qualify for debt consolidation and other government programs.


And all that is at the expense of those of us that are responsible. We pay higher rates and more fees than we otherwise would to compensate for these folks. We pay higher taxes to fund the government programs that these folks use.

#4

Thank you, again we look like fools for actually buying a home we could afford & making the payments while the people who jumped in over their heads and mismanaged their budgets are REWARDED...

#5

Really? So, maybe as a responsible citizen who bought within my means and worked hard to get my mortgage paid down - I get no reward? But those who "bit off more than they could possibly chew" get rewarded? Who's going to pay for that???


"Fair" is apparently only fair when it benefits the irresponsible!
Irresponsibility has become an enterprise in this nation - it gives a whole new meaning to "free enterprise".

#6

So let me get this right. If I would have just made some bad decisions and taken out some home equity loans in a time of economic downturn, I could have had the gov't give me up to 30% of that money for free. That sounds great. I mean after all they're going to take it from the ones who made good decisions and give it to the ones who made bad decisions. Doesn't that reward bad decisions? Isn't that Marxism? And can people honestly argue that this administration isn't socialist?
 
#7
 
Hey Bank of America, I’m not stupid enough to take on an adjustable rate mortgage that I won’t be able to pay off once the loan resets, and I’m responsible enough to do the math, figure out what I can afford, and live within my means. I even saved up a rainy day fund to handle unforeseen emergencies before I ever borrowed to buy a house.



Seriously BOA, it is unfair these stupid and irresponsible morons who bought more house than they could afford with creative financing schemes like interest only loans, negative amortization loans, and balloon payment loans get principal reductions while their smarter and more responsible neighbors get NOTHING. Actually it is worse than getting nothing. Their smarter and more responsible neighbors are paying for it in the form of higher taxes and losses in their retirement accounts because their retirement accounts may have held bank stocks either directly or indirectly through mutual funds. The bank stocks cut their dividends and the stock prices dropped because the deadbeats didn’t pay their mortgages like they agreed to do when they signed on the dotted line.


#8

I am an idiot. I have a BOA mortgage and paid my mortgage. I didn't buy a boat or a camper or a Harley, I still drive two vehicles that are paid for. I don't fly when I go on vacation. I live within my means. If I was smart 10 years ago, I would have bought a Harley, a big boat and a nice shiny new truck to haul everything and let my mortgage go. I would have all my toys and the bank forgiving 30% of my debt. Oh well, live and learn.

#9

In other words, everyone who worked hard and saved a down payment is getting the shaft. If two people bought a house for 300k, one with 0 down and one with 60k down, the one with no down payment now owes less than the one who shelled 60k out of their own pocket. ...... I guess this is why we have govt., to offset the rewards of responsibility and hard work that the natural world provides. Thanks Obama! I don't really see any pt in going to work anymore.

#10

So let's reward the numbnuts who bought a house they couldn't afford while those of us that are financially responsible keep paying what we owe. Just another example of how personal responsibility is no longer important to many people...

#11

BofA will probably make up the difference by sucking the money out of its responsible borrowers and other account holders by socking them with more hidden fees.

#12

Absolute nonsense... Look under virtually any of these problems and you'll find overspending, equity loans that went to vacations, unneeded luxuries, expensive cars, and other assorted junk. i.e. mismanagement of money.

Had these people lived within their means, didn't over buy, buy McMansions, and spent responsibly they wouldn't need a bail-out at, what will eventually be, our expense..


This is pure BS...

#13

This country is no longer about being a land of opportunity, it is about taking from the responsible to give to the irresponsible. I am underwater because of all the foreclosures in the area I live. Many have just decided to stop making the payments and bank what would have been their mortgage payments. With a lawyer you can stay in your house for free for 3 years or more. Yet there are those like myself who do the responsible thing and continue to make mortgage payments. But no one cares about us. Maybe we should just all stop making our mortgage payments and expect Obama to bail us all out.

#14

Only in America in 2010. If you were prudent and decided to forgo the mcmansion you couldn't afford and paid your monthly payment faithfully on the home you could afford you now find yourself subsidizing the deadbeats and would be Donald Trumps who acted irresponsibly and got in way over their heads. How stupid can the banks and govt be. They are encouraging more of the same behavior in the future.

Ain't no free lunch folks, someone (meaning you and me) will pay to clean this mess up.

#15

what about us? The people that live within their means, pay their mortgage and bills on time. We do it right and get the shaft...nothing for us... I can't stand it any more.


Sowing the seeds....

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