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Bailout bill

david_mcmanusdavid_mcmanus
edited August 2008 in The Economy
http://money.cnn.com/2008/05/07/news/ec ... tm?cnn=yes

From the article:

"To qualify, the lender would have to cut the debt to no more than 85% of a home's appraised value."

So the bank would have to cut the mortgage to 85% of the house's appraised value today? If Johnny Homeowner got a loan in 05 for 750K and the house now appraises at 500K, the new amount Johnny owes at most would be 425K or is there something I'm missing. I guess the bank would look at it as getting at least something, but I'm got some real issues with this.

It just seems like we're enabling people's stupid decisions.

Comments

  • WestSideBillyWestSideBilly
    That's pretty much what a bailout is. Enabling poor economic decisions. In theory you do it because the overall cost of the bailout is less than the overall cost of letting things sort themselves out. In this case it strikes me a bit as political pandering, a bit as a handout to the banks (which should have known better), and a bit of legitimate economic policy.

    In your example, I don't see the benefit to the bank. If the house is worth 500k and they can get a buyer at 500k, they'd be $75k ahead by foreclosing on the current tenant rather than dropping their mortgage from 750k to 425k. They still lose a lot of money, but $250k loss isn't as bad as a $325k loss.

    Great deal for the current homeowner.
  • david_mcmanusdavid_mcmanus
    I think the problem is actually getting a buyer. Something is better than nothing.
  • bilirubenbiliruben
    Foreclosures are wicked expensive for banks. IIRC they get about 2/3rd of appraised value when all's said and done. Plus you avoid those folks who gut the place before they leave.
  • perfectfireperfectfire
    david_mcmanus wrote:
    I think the problem is actually getting a buyer. Something is better than nothing.
    But doesn't an appraisal at x dollars mean that the home would sell, at that time, for that amount? So if it can't sell for the amount it's appraised for then the appraisal is wrong and it should be appraised for less.
  • bilirubenbiliruben
    There are large transaction costs associated with foreclosing on a house.

    In addition, banks have no interest in having a whole stable of properties, so they generally list below market I think. They don't have employees that manage properties; they're banks. They just want it gone
  • jonjon
    I don't see how this is a bailout. If the bank is willing to write-off the loss from 750K down to 425K, why not let them? All this bill does is help get around the red-tape of obtaining the same FHA backing that a mortgage on the same house would get from a normal sale. By requiring the banks to drop the mortgage to 425 instead of just 500, it makes sure that taxpayers are not hit up right away if the house falls in value more.

    The bill seems like a good idea because the burden falls on the bank, where it belongs for writing such a bad mortgage to begin with.
  • rose-colored-coolaidrose-colored-coolaid
    david_mcmanus wrote:
    It just seems like we're enabling people's stupid decisions.

    That's why they call it a bailout. If it didn't enable stupid decisions, it'd be called an "earn out."
    jon wrote:
    I don't see how this is a bailout.

    See above. Look, I don't have a problem with banks bailing out homeowners. In fact, both the bank and homeowner should be taking a cut of the pain. So long as my tax money isn't used (much) I'm fine with it. I quantify it because it's okay to use a little for administrative costs and other lubrication to help the banks/homedebtors work together.
  • Lake Hills RenterLake Hills Renter
    The current bailout bill is making me nauseous.

    $800 billion blank check of taxpayer money to the Treasury Department. $3.9 billion for local governments to buy and refurbish foreclosures. 400,000 mortgages refinanced to better terms with taxpayer money.

    There's no way our two Senators are voting against this. I'll be taking a serious look at my incumbents this year, and this bill is the first litmus test.

    I think I'm gonna vomit.
  • rose-colored-coolaidrose-colored-coolaid
    Fleckstein has some comments on the bailout bill. Will it work?
    Even though folks are focused on foreclosure rates, rental vacancies are just as material. As of the end of the second quarter, vacant rental units stood at 10% (about 3.94 million units), up from the 43-year average of 7.16%.
    overall housing vacancy rate climbed to 14.36% against a 43-year average high of 10.75%. (There are roughly 130 million total units, with 18.6 million vacant.) In order to get back to the 10.75% mean, the U.S. would have to create about 4.7 million households. To achieve equilibrium, we would need to create about 6.6 million jobs (assuming 1.4 jobs as creating a household) and not build one additional housing unit.

    But his best statements were regarding us as compared to 1980-90s Japan. He would point out how similar the problems were and people would respond that we do things differently here.
    It's true, we do do things differently here. But what we do differently is we don't save money, as the Japanese do, and we don't run a trade surplus, as they also do.
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