ARM Bailout Unfair to Responsible Borrowers
If we are going to freeze subprime interest rates at their original rate for the next 5 years, I pose the following question:We bought our house one year ago with a 30 year fixed mortgage. Why? We thought rates were going up and the ARM's that were being offered were 3 year ARM's at about a point lower than ours ended up being. Had we gone with the 3 year ARM at the time, we would have saved just under $200 a month.
My question to Hillary and Paulson is: If you are going to bail out those of us who got in way over their heads or just speculated and lost, what about those of us who made the right decision? Aren't you just stoking the irresponsible behavior that spawned the current situation? Are we going to get a pat on the back for making the right choice?In our case, choosing the ARM and then getting the 5 year freeze the government will be offering would put an additional $14,400 in our pockets. That will teach me to do the right thing.
This is the problem when government steps in the market. They end up screwing those who have done nothing wrong in order to protect those who bought something they either did not understand, could not afford, or gambled and are losing.
I am sorry, but when you become the backstop to irresponsible behavior, instead of solving it you cause it to proliferate. This is like your kid driving like a lunatic despite your constant warnings and then crashing the family car. Do you rush out and buy him a new one? Hell no! Give him or her a bike, tell them to suck it up and buy the next one themselves.
Same with these homeowners. If you bought a house you clearly could not afford just to impress the folks at work, used the low "teaser rate" to get in and either:
A) did not read the document you signed that told you when and by how much the rate would adjust to and what those payments would be,
B) figured the housing market would go up forever and you would eventually have the equity because of that to refi into a better loan (gambling) or
C) neither and "just had to live in that house"
then what is happening to you is just too bad. If you are dumb enough to just roll the dice with the largest single investment you will ever make, then if the dice comes up seven, sorry, but you crap out. There is no reason the rest of us who are responsible both with our spending and the house we bought ought to be forced to subsidize your stupidity. That is not the way this game is supposed to be played. Some win, some lose.
This bailout? We all lose. Why?
These folks will just have the eventuality of foreclosure put off a few years. housing turns like a supertanker. In areas where prices are down 40% to 60% from their peak, it will take the better part of the current decade and well into the next for these folks to have the equity they need the actually refi into a better loan.
You will now have people at the margins, folks who made the right decision but were not really sure about it, deciding that riskier is better. Rather that being satisfied with their decision, they will resent the folks across the street whose rate has been frozen below theirs and will decide "next time, I am doig what they did". Now we proliferate the problem.
The "bailout" and yes, that is exactly what this is, will not solve the problem. Pain and suffering will. As long as people think there is a safety net, they will continue to do the things that get them into this problem. All you are doing is guaranteeing this happens again.
Todd Sullivan is a Massachusetts based value investor. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He typically has a holding period measured in years. His blog features simply the best ideas he has and he updates readers on their progress in a timely fashion. For more information visit his site: ValuePlays
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