Subprime bailout: help thy neighbor or teach 'em a lesson? - Page 2

The Honest Dollar · 01-03-2008, 08:39 PM

The problem with the bailouts is that even though they are temporary and only apply to a few people, most people think that they're more comprehensive.

This is a problem on a couple of levels.

(1) People who are in mortgage trouble (and even those who aren't) perceive the government as an entity that will come along and save them when they get themselves into trouble. This creates a huge moral hazard. If everyone started going wild on credit cards (and they pretty much already are), then will the government bail them out too when defaults start rolling in?

(2) People support the bailout because they think the economy will sink without it. The economy will do what it will do regardless of this plan, which is a bandaid on a huge gangrenous hole. Because the bailout is temporary and smaller in scope than most people perceive, it probably won't do much to rescue the economy. (Even less so if everyone starts defaulting on credit cards and other loans.)

With that said, I'm really, really ambivalent on the bailouts. The rational side of me says they're unfair for those who borrowed responsibly and they do a disservice to those who didn't and now learn the lesson that the government will fix their boo-boos rather than the more valuable lesson that you shouldn't buy more house (or anything else) than you can afford. The emotional side of me, though, feels sympathetic towards people who have foreclosed or will have to foreclose soon. Sure, some of them can rent. But they've lost their homes, and while they bear some responsibility for the consequences of their actions, many of them were also lured in by predatory lenders.

I really hope everyone learns something from this whole debacle. But I doubt many people will.

soupkitchen96 · 01-06-2008, 04:13 AM

Quote:

Originally Posted by The Honest Dollar

The emotional side of me, though, feels sympathetic towards people who have foreclosed or will have to foreclose soon. Sure, some of them can rent.

Do you know anyone who is personally going through a foreclosure? I don't have a whole lot of sympathy for them, but I've been told that I'll have a much different perspective if someone in my life were affected.

Miss Rosie · 01-06-2008, 10:21 AM

The thing that bothers me is that the big banks behind these loans will be bailed out, one way or another, while the individuals who were hit by them won't be.

There's been another interesting bit of fallout. A lot of these loans were repackaged and sold as low-risk investments to cities, individuals and charities. Now that they're tanking, a lot of people who bought into them specifically because they were marketed as being very low-risk are losing money they can't afford to lose.

I read three papers a day and have been watching this mess. It's like watching an avalanche.

The winners in the end will be the banks, who not only knew perfectly well what they were doing, but deliberately sought out ways to break the rules in order to do it. They essentially marketed money to people who were desperate for it, and they did it coming and going, lending at outrageous rates to the poor and then selling those loans to others who were poor in different ways.

I'm at an income level that makes me a perfect target for sub-prime lending of all kinds. Believe me, on offers and contracts aimed at people at my income level (about half of median), the small print is miniscule and syntactically convoluted, requiring at least a college reading level to sort through.

And no, I'm not going to be hit by this. I have a college reading level, but most of the people who signed up for these loans didn't, nor did they have enough money to get a second opinion. Even the "bailout" itself is worded in such a way so that almost no one will be able to qualify for it.

The Honest Dollar · 01-06-2008, 07:56 PM

Quote:

Originally Posted by soupkitchen96

Do you know anyone who is personally going through a foreclosure? I don't have a whole lot of sympathy for them, but I've been told that I'll have a much different perspective if someone in my life were affected.

No, I don't know anyone specifically. But I imagine it would be horrible to lose your home, and probably even worse if you thought it was your fault.

The Honest Dollar · 01-06-2008, 08:01 PM

Quote:

Originally Posted by Miss Rosie

The winners in the end will be the banks, who not only knew perfectly well what they were doing, but deliberately sought out ways to break the rules in order to do it. They essentially marketed money to people who were desperate for it, and they did it coming and going, lending at outrageous rates to the poor and then selling those loans to others who were poor in different ways.

I think you're confusing lending banks (say the local commercial banks) who made the loans, sometimes to people they shouldn't have, and investment banks who bought these loans from the lenders then repackaged them for sale. I work for an investment bank, and I can tell you that the people I work with aren't evil. They aren't sitting around a table in a dark room, smoking cigars and figuring out how to screw the little people. They created SIVs and CDOs because there is a demand for them.

And it was ratings agencies like Moody's and Standard and Poor's, not banks, that ranked these securities packages as high or low risk. The municipalities, pensions, charities, etc. that bought these loans are to blame as well for not doing their homework and investigating the underlying assets of these repackaged debts. This is the same mistake that people made by buying tech stocks at the end of the run-up, right before the bubble burst. You can't blame banks for selling something that investors wanted to buy.

And not all banks are getting bailed out, or bailed out enough. I know people who are being laid off from the banks because the banks lost money on these vehicles and have to cut costs.

Not everything is a conspiracy between big business and the government.

Miss Rosie · 01-07-2008, 12:07 AM

Well, I don't think it's a conspiracy, but a mix of blind greed and doing what can be gotten away with. I just have less sympathy for the banks than I do for the poor fools who took out or bought those loans. Those who signed on the fated line at least meant well for the most part, whether it was a home for their family, a pension for their employees or whatever. What the people who designed the loans, those who repackaged them and those who rated the results were thinking is another thing entirely.

But yes, it rather fries me when people say, "Well, they should have known better/read the fine print/done their homework." The banks, both lending and investment, should have known better, too. Even worse, they wrote the fine print, or withheld it as the case may be, resulting in practices that have been described as everything from unfair to abusive. As far as doing their homework is concerned, apparently that wasn't attended to very well. They ignored warnings, bent rules, and resisted any outside attempt to put a stop to this before it picked up too much momentum.

In the meantime, regular people were being encouraged to "invest" in the "good debt" of homeowning by every financial guru out there, and those who were the perfect candidates for subprime loans were being actively solicited. I ought to know, as I got phone calls and letters regularly. Still do. Darned right, there was a demand. A lot of people who should have known better were helping to create it.

Clearly I'm in the minority here, so I'll shut up after this, but I used to work for an agency that served two of the biggest investment banks in the world. When the warning shots were fired back around 1999 - 2001, I heard them, and I didn't believe it when I was told not to worry my pretty little head over things I couldn't possibly understand, and meanwhile owning my own home was the best investment I could make, and it's easier now than ever before! Unfortunately, most people didn't have ready access to the same information I had. How were they supposed to know they were being tricked and lied to?

rstlne · 01-14-2008, 02:01 PM

No bailouts! If we bailout homebuyers, who's next? People who can't make their car payments?

The deeper reason why I don't support bailouts of any kind is it creates a moral hazard. People will take on more foolish investment risks knowing that the government will bail them out if there is a bust. If people feel they were defrauded or misled by banks and mortgage companies, let them instead sue those banks and mortgage companies.

Gootsy · 01-14-2008, 03:19 PM

I think they should offer some bailouts to specific cases... The ones that can be salvaged

Seems to me that many of these people who leapt before they looked, are in such trouble that no reasonable 'bailout' can save them.

"The burned hand learns best." So hopefully it'll be lesson learned.

Oh yeah and yay me for living in Canada where the banks/brokers aren't allowed(AFAIK) to do this stuff

View Poll Results: Should we bail out the subprime mortage borrowers?
Yes. It is the neighborly thing to do.	1	6.25%
Yes. Because otherwise the economy will collapse.	5	31.25%
No. They dug their own graves.	6	37.50%
Maybe. In situations where there was gross misrepresentation by the lender	4	25.00%
Voters: 16. You may not vote on this poll

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01-03-2008, 08:39 PM	#11
The Honest Dollar Member Join Date: Dec 2007 Location: New York Posts: 90 Reputation: (63)	The problem with the bailouts is that even though they are temporary and only apply to a few people, most people think that they're more comprehensive. This is a problem on a couple of levels. (1) People who are in mortgage trouble (and even those who aren't) perceive the government as an entity that will come along and save them when they get themselves into trouble. This creates a huge moral hazard. If everyone started going wild on credit cards (and they pretty much already are), then will the government bail them out too when defaults start rolling in? (2) People support the bailout because they think the economy will sink without it. The economy will do what it will do regardless of this plan, which is a bandaid on a huge gangrenous hole. Because the bailout is temporary and smaller in scope than most people perceive, it probably won't do much to rescue the economy. (Even less so if everyone starts defaulting on credit cards and other loans.) With that said, I'm really, really ambivalent on the bailouts. The rational side of me says they're unfair for those who borrowed responsibly and they do a disservice to those who didn't and now learn the lesson that the government will fix their boo-boos rather than the more valuable lesson that you shouldn't buy more house (or anything else) than you can afford. The emotional side of me, though, feels sympathetic towards people who have foreclosed or will have to foreclose soon. Sure, some of them can rent. But they've lost their homes, and while they bear some responsibility for the consequences of their actions, many of them were also lured in by predatory lenders. I really hope everyone learns something from this whole debacle. But I doubt many people will.

01-06-2008, 10:21 AM	#13
Miss Rosie Senior Member Join Date: Jan 2008 Posts: 101 Reputation: (27)	The thing that bothers me is that the big banks behind these loans will be bailed out, one way or another, while the individuals who were hit by them won't be. There's been another interesting bit of fallout. A lot of these loans were repackaged and sold as low-risk investments to cities, individuals and charities. Now that they're tanking, a lot of people who bought into them specifically because they were marketed as being very low-risk are losing money they can't afford to lose. I read three papers a day and have been watching this mess. It's like watching an avalanche. The winners in the end will be the banks, who not only knew perfectly well what they were doing, but deliberately sought out ways to break the rules in order to do it. They essentially marketed money to people who were desperate for it, and they did it coming and going, lending at outrageous rates to the poor and then selling those loans to others who were poor in different ways. I'm at an income level that makes me a perfect target for sub-prime lending of all kinds. Believe me, on offers and contracts aimed at people at my income level (about half of median), the small print is miniscule and syntactically convoluted, requiring at least a college reading level to sort through. And no, I'm not going to be hit by this. I have a college reading level, but most of the people who signed up for these loans didn't, nor did they have enough money to get a second opinion. Even the "bailout" itself is worded in such a way so that almost no one will be able to qualify for it.

01-07-2008, 12:07 AM	#16
Miss Rosie Senior Member Join Date: Jan 2008 Posts: 101 Reputation: (27)	Well, I don't think it's a conspiracy, but a mix of blind greed and doing what can be gotten away with. I just have less sympathy for the banks than I do for the poor fools who took out or bought those loans. Those who signed on the fated line at least meant well for the most part, whether it was a home for their family, a pension for their employees or whatever. What the people who designed the loans, those who repackaged them and those who rated the results were thinking is another thing entirely. But yes, it rather fries me when people say, "Well, they should have known better/read the fine print/done their homework." The banks, both lending and investment, should have known better, too. Even worse, they wrote the fine print, or withheld it as the case may be, resulting in practices that have been described as everything from unfair to abusive. As far as doing their homework is concerned, apparently that wasn't attended to very well. They ignored warnings, bent rules, and resisted any outside attempt to put a stop to this before it picked up too much momentum. In the meantime, regular people were being encouraged to "invest" in the "good debt" of homeowning by every financial guru out there, and those who were the perfect candidates for subprime loans were being actively solicited. I ought to know, as I got phone calls and letters regularly. Still do. Darned right, there was a demand. A lot of people who should have known better were helping to create it. Clearly I'm in the minority here, so I'll shut up after this, but I used to work for an agency that served two of the biggest investment banks in the world. When the warning shots were fired back around 1999 - 2001, I heard them, and I didn't believe it when I was told not to worry my pretty little head over things I couldn't possibly understand, and meanwhile owning my own home was the best investment I could make, and it's easier now than ever before! Unfortunately, most people didn't have ready access to the same information I had. How were they supposed to know they were being tricked and lied to?

01-14-2008, 02:01 PM	#17
rstlne Senior Member Join Date: Jan 2008 Location: New Jersey Posts: 364 Reputation: (115)	No bailouts! If we bailout homebuyers, who's next? People who can't make their car payments? The deeper reason why I don't support bailouts of any kind is it creates a moral hazard. People will take on more foolish investment risks knowing that the government will bail them out if there is a bust. If people feel they were defrauded or misled by banks and mortgage companies, let them instead sue those banks and mortgage companies.

01-14-2008, 03:19 PM	#18
Gootsy Senior Member Join Date: Jan 2008 Posts: 252 Reputation: (24)	I think they should offer some bailouts to specific cases... The ones that can be salvaged Seems to me that many of these people who leapt before they looked, are in such trouble that no reasonable 'bailout' can save them. "The burned hand learns best." So hopefully it'll be lesson learned. Oh yeah and yay me for living in Canada where the banks/brokers aren't allowed(AFAIK) to do this stuff