Economic Ignoramus has a question

[CriticalThanking]

It was my understanding that all banks are insured up to something like $100,000. Therefor I do not see what this has to do with people who put money into savings that are not involved in the home selling/buying.

But at the end of your post, you add this:

and the government (through the taxpayers) isn't entirely supporting the banks poor decisions.

The FDIC insurance to which you refer is taxpayer money. This is still a bailout at taxpayer expense. This also only addresses small account holders in banks. Other shareholders and larger depositors lose. Not all mortgage compaines are banks. As I mentioned earlier, there are also mortgage backed securities, which have no such insurance. How are they different than bank investors? Small depositors in banks are ok, but CALPERS pensioners are not?

I doubt many of the people who bought these homes or refinanced understood the situation. I would guess that it was largly the banks explaining how things work, what would happen, and the values of these homes to the buyers. After all these are the experts, not the working mom. It is also the banks that chose to perform this service to people, the lending, because they believed the risk was worth the potential reward. Risk is not risk if you can have the government and the taxpayers bail you out when you lose. I bet many of those homeowners don't understand why their home was suddenly worth less than they were told it was either. So I again do not understand why so much blame gets put on the homeowners rather than the business.

I would prefer not get into a discussion of whether or not borrowers are "too stupid" to be allowed to sign mortgages. I know you did not use those words. What magic formula should the lender recite such that borrowers are considered educated enough to sign a loan? I recently attended a lecture by Neil deGrasse Tyson [the man ROCKS!] in which he said "This is not a mortgage or credit crisis. This is a crisis of insufficient math education - on both sides."

Risk is not risk if you can have the government and the taxpayers bail you out when you lose.

Why is this any less true for the borrower?

Enough for the moment.

CT

 

[cheat3]

OK i didnt say that People who cant afford to repay their loans should be let off, however neither should the banks

(1) Should the banks have made every loan they did? Easy call - no. Which ones should they have made? Tougher call. There are far fewer subprime loans being made now. Is that a good situation? Not for the borrower who would pay on time but cannot qualify under current guidelines.

no not for the borrower who would pay on time but cant qualify, my only point being that this is the fault of teh banks, not currently defaulting borrowers.

(2) Should the banks have had higher reserves? Absolutely. This is certainly a failure of risk management by the lenders and regulators.

ok

(3) Once a lender is insolvent, what should happen to the property? Why reward the defaulting borrower? Why do it at the cost of a legitimate investor? The asset is owned by the lender. Should it not be just like any other asset to be liquidated for whatever you can get out of it? Why give it to the borrower?

I agree, i didnt say give the things back to the defaulting borrowers.

(4) Investors take risks. If you are willing to take away the depositor's assets (or those of the investors in mortgage backed securities), why should the borrower (an investor expecting equity and/or profit on resale for the investment) not be liable for the loss as well? Why reward the borrower over the lender?

I didnt say the borrower wasnt liable for the loss, only that it is more the fault of tha bank.

(5) Why should a borrower signing a legally agreed upon contract not be held to those terms? Why should they be "given" the home? Why take an action not in the contract at the expense of the lender and not the borrower?

of course they should, i never said otehrwise, what im saying is that teh default is the fault of the bank, the borrower signed the paper, whatever their bed sleep in it. but the bank has been giving out loans for hundereds of year in some cases, they should know the relative risks of the poeple they are lending money to, it is their responsibility to hand out loans responsibly.

Notice that I did not bring in the motive/wrongdoings of either the lender or borrower in any of these points. This is not a blame game. Which investor should have priority over the other and why? Which signator to the contract should have priority?

OK, i was talking about a blame game, sorry if i didnt make that explicit enough. I didnt make any financial statments, i was passing moral judgement of the banks loan policies, and trying to excuse the "bad borrowers"

sorry cant tidy this up have to go back to work, talk later

 

[Merko]

Adjusting loans for people who have no realistic chance to pay their current loans is probably a good idea. That way, they can keep paying as much as they realistically can, and they can stay in their houses. Of course there is a certain risk of 'moral hazard' here, but as long as the new terms are set to be 'survivable' rather than 'favourable', I don't think that's a huge problem really. The lesson will be 'if you act irresponsibly, you will get burnt and it will hurt like hell' instead of 'if you act irresponsibly, you will get burnt to death'.

 

[CriticalThanking]

Cheat3 - sorry if I misunderstood your posting. I thought you were in part addressing Homeland Insurgency's idea of giving the house to the borrower.

I guess we simply disagree on who is "more at fault." Regardless of who is >50% at fault, the contract is what it is. It is up to the lenders to find a way to deal with it, including accepting pennies on the dollar at times.

And curse you for not cleaning up the format of your post. My eyes are too old for that!

CT

 

[balrog666]

Adjusting loans for people who have no realistic chance to pay their current loans is probably a good idea. That way, they can keep paying as much as they realistically can, and they can stay in their houses. Of course there is a certain risk of 'moral hazard' here, but as long as the new terms are set to be 'survivable' rather than 'favourable', I don't think that's a huge problem really. The lesson will be 'if you act irresponsibly, you will get burnt and it will hurt like hell' instead of 'if you act irresponsibly, you will get burnt to death'.

If mortgage contracts are subject to devaluation at a whim, and without recourse, the number of mortgages will go down and the interest rates will go up enormously just to compensate for the added risk tot he lender.

Just one more nail in the coffin of capitalism from Obama and his team of idiots! But I guess that's what happens when the vote goes
Parasites: 54, Host: 46.
.

.

 

[The_Animus]

CriticalThanking: I typed up a nice long response to everything but due to a forum hiccup it was all lost and wasn't posted. I don't really have time to redo it all so I'll just cut it down to 2 questions.

1. How are people who deposit into the banks that aren't home loan borrowers incurring expense from this?

2. In what way does the current bank bailout plan help a greater number of the American people than my suggestion?

 

[cheat3]

Cheat3 - sorry if I misunderstood your posting. I thought you were in part addressing Homeland Insurgency's idea of giving the house to the borrower.

I guess we simply disagree on who is "more at fault." Regardless of who is >50% at fault, the contract is what it is. It is up to the lenders to find a way to deal with it, including accepting pennies on the dollar at times.

And curse you for not cleaning up the format of your post. My eyes are too old for that!

CT

cool man, I just really think banks are run like slave factories.

 

[bobrayner]

cool man, I just really think banks are run like slave factories.

Really? I thought that people's transactions with banks were voluntary.

 

[The_Animus]

transactions with banks were voluntary

Many things in our society which are technically voluntary are really a choice between compliance and shooting yourself in the foot. In such cases none of the choices you are presented with are ones you would choose voluntarily.

 

[bobrayner]

In the real world, we also have competition between banks. Even if it's necessary to use a bank (although it's possible to avoid it; my wife didn't bother for the first couple of years she was in the country), it's still possible to choose which bank to use. If - regardless of available evidence - you decide any particular bank treats people like slaves, you may choose another.

Even if you believe all banks treat each people like slaves, either:
(A) The market is ripe for one bank to break ranks (or another bank to enter the market) and attract huge amounts of business by treating people nicely. So ripe, in fact, that it's amazing it hasn't happened already.
or:
(B) Your belief is wrong.

I think B would be the more likely option; but if you have any evidence to the contrary I'd love to see it. Where are the slave factories?

 

[The_Animus]

I never said they were slave factories. That was someone else. All I'm saying is sometimes even when you have a choice you don't really have a choice.

Is there any market that you can think of that is largly corrupt, harms the environment or charges common people an unfair price for their own person benefit (such as large bonuses)? How does your (A) or (B) scenerio apply there? I'm sure you can find loads of attrocities that Big Oil or Big Agra/Meat commit. Then you have all these poorly run banks and investment firms who give themselves giant bonuses rather than give customers a better interest rate or I don't know, not run the company into the ground. Where is the person breaking into the market to do it right for those businesses? In the real world the game isn't played fairly and anything that can be gotten away with is.

 

[Homeland Insurgency]

Thank you for all of your responses. Though it's still a blame game isn't it? And I'm still an economic ignoramus.

So what about who is to blame anymore? Who cares? I read this week that homeowners in trouble will now be able to renegotiate their mortgages for 1/3 of their monthly income. I really don't know how it works or who is eligible but I also heard that it might help 9 million families. This is good if it really helps the economy as a whole. I won't be one them. I'm not in trouble and that is fine with me.

I am still wondering though what would happen if 9 million people owned their homes out right. No payment to make every month. Some people used to think that $600.00 a year in a tax refund was an economic stimulus. Some people these days think that giving people a few extra dollars in their paycheck every month is a economic stimulus even in a time of mass unemployment.

Let's say for instance that some people are correct in that these people with the bad mortgages are irresponsible. What would they do with an extra $600.00, $1,000, or $2,000 and more a month? Might they go out and pump it into the economy down at WalMart, Chucky Cheese, or the Phat Rims emporium? What if they're not as irresponsible as some here want to believe? Might they deposit some of that extra real hard earned cash in a bank?

What's the alternative? Print more money and bailout more banks who still have their hands out asking for more? Who is going to pay for these bailouts? Who would pay in just giving some of these homes away? Not me. If it really bothers you think of it as them winning a lottery. It's an economic stimulus that your children won't have to pay for.

Still I ask why is it crazier then anything else they are trying right now?