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Just Who Is Getting Bailed Out?



December 06, 2007 – Comments (3)

I was reading comments on a blog about the "bailout" for home owners with interest rates due to reset which would freeze the interest rates.

The comments amazed me to the degree to which they were attacking these people as highly irresponsible and they were highly critical of the bailout.

My read of the "bailout" and examples given are not 1 and 2% loans that were resetting, but 5-8% loans that were resetting up to the 11% range.

What amazed me about the comments is the demonstration of no understand that people who stick around and continue to pay for these depreciating properties are actually the responsible ones and they would be far, far, far better off handing in the key and walking away. The loss of having the rate reset is an utter pittance to investors holding these thing in comparison to the losses they will suffer should these people decide to walk away.

This isn't a bailout for these people, it is a guarantee that will struggle for life with very, very, very little reward for how hard they work. The spending will stop as they are essentially cut off from new credit for life now. I personally doubt that wage increases will ease the burden.

However, those that walk will be able to reduce their spending to be within their means. I suspect they are likely to be more eligible for credit in 7 years than those that stick around and their household balance sheet is likely to look far more healthy.

One thing that I am not clear on, and in this case investors will lose enormously from having the rates not reset regardless, is if these bonds were prices for future income streams and discounted to say 5% because the market said getting a 5% return is great.

Seeing how I'm dealing with frozen pipes, no toilet water, no heat and -48 outside, I don't have time to do the calculations, but perhaps I'll find time later to step through the consequences of paying for future income streams. Meanwhile, I'm heading to school to use the washroom and counting my blessings space heaters exist and we have power. I am really hoping we still have water flow to our hot water tank as we have no cold water flow to our taps...

3 Comments – Post Your Own

#1) On December 06, 2007 at 12:37 PM, floridabuilder2 (97.92) wrote:

so if you freeze arms.... as a lender why would you write new arms?  how do you know that the govt wont freeze more....  what would prevent the govt from lowering rates?  my point is that everyone is stoked about arms being frozen, but what they don't understand is that lenders will now price into new products more conservatism to offset govt intervention... on top of the convservatism they have put into new loan packages to offset falling home prices (e.g. more money down or skin in the game from the buyer)


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#2) On December 06, 2007 at 2:41 PM, dwot (29.01) wrote:

I just looked at Nouriel Roubini blog on the topic and think he says it very well.  Essentially, if current homeowners default investors will get 0% instead of 7%.  7% is far better than 0% even if you were expecting 10%.  Home owners would be likely to live with making no payments until evicted if they default.

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#3) On December 06, 2007 at 7:02 PM, dwot (29.01) wrote:

floridabuilder, I doubt that arms would be written with the same kind of loan standards that the ones that are being frozen had.  This is because of the loose lending practices. 

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