Friday, December 07, 2007

Top 6 Reasons The Subprime Bailout is a BAD Idea

No Government Methadone for Reckless Credit Junkies

Top 6 Reasons The Subprime Bailout is a Terrible Idea, using information from yesterday's WSJ editorial:

1. Investors and mortgage servicers have incentive to avoid foreclosures on their own. Investors typically lose 30% to 50% of the unpaid mortgage balance when a home has to be resold due to foreclosure. So they have every incentive to renegotiate subprime loans that are expected to become delinquent. And that process is already well under way.

2. The U.S. economic and legal systems are built on the sanctity of contract, and even the hint that government is compelling investors who now own these mortgages to take less money puts the U.S. on a very dangerous road.

3. It will raise the future risk premium that investors will demand for investing in U.S. real estate, which means it will be costlier to get a mortgage in the future.

4. Which borrowers will qualify for the lower interest rate payments? Almost all subprime borrowers will argue that they should benefit from loan forgiveness, especially if they've been responsible and sacrificed to make their payments. More than 95% of homeowners are making their payments on time, and it would be unfair for them to pay more in taxes to assist those who've been less responsible.

5. The evidence suggests that even when troubled borrowers receive a generous reset on their mortgage payments, as many of 40% of those borrowers still eventually default. The refinancing plan might only delay the day of reckoning and lead to bigger losses in a falling market.

6. Part of the plan would allow states to float more tax-exempt bonds to refinance subprime borrowers. This is clearly a taxpayer-financed bailout.

Bottom Line: The subprime bailout would be like a taxpayer-funded methadone program for reckless credit junkies and investors. We should learn to "Just Say No" to bad ideas like this.


At 12/07/2007 11:34 AM, Anonymous Anonymous said...

Investors typically lose 30% to 50% of the unpaid mortgage balance when a home has to be resold due to foreclosure.

How is that possibly typical?

At 12/07/2007 12:49 PM, Blogger Alex said...

I think he meant to say the lenders, rather than the investors.

At 12/07/2007 4:59 PM, Anonymous Anonymous said...

alex a, how would a lender typically lose 30% to 50% of the unpaid mortgage balance when the home has to be resold due to a foreclosure?

Where do all the extra expenses come from?

At 12/07/2007 5:10 PM, Anonymous Anonymous said...

"investors" are the people who bought up all the mortgage-backed-securities. when the mortgage service co. has to dump the house in a firesale the investor ultimately looses 30-50% of whats owed on the security he holds.

At 12/07/2007 9:55 PM, Anonymous Anonymous said...

My bad, I guess I misunderstood that. Carry on.

At 12/09/2007 12:49 PM, Anonymous Anonymous said...

dks, thank you for the response and to you to alex a.

Why can't foreclosed properties be sold like a regular property for market rates? Why does a foreclosed property have to be sold at such deep discounts?


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