This past week, President Bush argued that the Federal Government should help the homeowners who are at risk of defaulting on their loans which they can no longer afford.
Over the past month, we have heard the media describe the borrowers as victims. They say that the mortgages were pushed upon them. They were tricked into taking out more money than they could afford.
It is easy to blame the mortgage companies. Yes, they did try a number of ninja loans that were risky. Yes, a bunch of those loans will default. And yes, the homeowners will lose their homes. All terrible stuff, right?
Wrong. The homeowners don't actually own anything. In fact, some of them will make a good bit of money out of their little mess. First, if they have a 125% loan-to-value deal, that means they never put any money into the house. If they have been paying interest only, then they have zero equity to lose. They are glorified renters. When the bank forcloses on the house, they will end up keeping that extra 25% of the loan. Why? Because it was used to pay off their credit card debt (Victims of the subprime mess were also victims of the credit card debt mess too).
So here is a little example:
Joe buys a house for $300,000. He takes out a ninja loan for $350,000 to pay off and "consolidate" his credit card debt which he ran up in his wild 20's. His monthly interest-only payment starts off at $1458 per month. All is well in the world. Joe is a fancy guy in a fancy house.
But wait! The evil lender pulled a fast one. (Not really, it was all spelled out in their loan agreement and Joe had an attorney do his close so he should have known it was coming!) The lender tied the 3rd year of the loan to float with prime. Now Joe is paying Prime +1 which makes his interest only payment $2890. How ever will Joe be able to get that new HD-DVR he has been wishing and praying for over the past 2 weeks.
Of course, this is when the Today show comes out with the sad story and the sad music about Joe. Joe who has already lost his dog to a Michael Vick dogfight. Joe who is a good guy and likes to work 40 hours a week. Joe who is an American just like you and me. (I apologize to our international readers, but being an American today means you never fail. That is why we have a government) Joe who is about to lose his house to a foreclosure.
After all the tears and sad commentary only briefly interrupted by a Flomax commercial, we all feel a little less secure.
If Joe, who is an American just like you and me, can lose his house then so can I!
On and on it goes with no end in sight. Here is the straight talk:
1. Joe is an idiot. He should never have bought a house without a down payment.
2. If Joe had not spent his earnings of his 30's while he was in his 20's (credit card debt) he might have a down payment.
3. Joe is an idiot (again). He never took the time to learn about how floating rate mortgages work. Nor did he ever learn how to plan beyond the next week.
4. Did I mention Joe was an idiot? By the way, Joe will make money by walking away from his loan because he is effectively paying off all his credit card debt when they take the house. You might say, but his credit would be destroyed. Duh! This idiot didn't have any credit. That is why he needed a sub-prime loan in the first place.
5. Finally, the government needs to butt out. Keep liquidity where needed. But forget about the Joe's of the world. Don't bail them out or the lenders or anyone else. Allow people to fail. It is part of life. It is how we grow and learn.
And this isn't even the reason I am so pissed today!