Letter to my Senator

Senator Barbara Boxer
112 Hart Senate Office Building
Washington, D.C. 20510

Dear Senator Boxer:

Like many Americans, I have followed the housing market with great interest.  In particular, I was awed by the rapid ascension of real estate prices here in California.  I, personally, reached a point financially where it was feasible to purchase a house sometime in mid 2005.  By this, I mean that I had a small down payment saved, good credit, and a stable enough income to feel confident that I would not miss any mortgage, insurance or property tax payments.  Of course, the use of negative amortization or interest only loans would have allowed me to make a purchase earlier, as prices were still rising rapidly.  However, I realized that keeping up with payment adjustments and rising rates would have put me at risk for default or foreclosure.

Ultimately, I was not lured by low interest rates and easy access to credit.  The offers from the supposedly predatory subprime lenders were abundant, but I cared enough about my financial future to do some research.  I learned quickly about the certainty (not likelihood) of payment adjustments and resets.  I understood that if I could not afford a house with traditional lending (30 year fixed, good credit, income documented), I should not take on the risk of home ownership.

Today, the press writes daily about the problems with subprime loans.  In their stories, they profile families who got in over their heads.  I wonder where these stories were two years ago.  I am thankful that I am not one of those families.  However, I do not consider it luck.  Families are forced into delinquency and foreclosure because they borrowed more than they could afford to pay.

All of this is unsettling.  As a patriotic American, I do not wish to see law abiding families in distress.  However, even more unsettling is the talk that I hear about a bailout for the borrowers and lenders of subprime loans.  We now hear stories of outright fraud on loan applications.  Whether they are the acts of lenders or borrowers, both parties must be held responsible for their respective roles.

The borrowers knew they were taking a gamble.  The gamble for those who entered the market early paid off richly, as they saw their real estate purchase appreciate in price.  Whether or not they were able to make their payments didn’t matter.  They sold at the higher price, pocketing a profit, tax free if they lived, or claimed to live, in the property for two years.  Those that came later witnessed the handsome profits, and sought to get their piece of the action.  It is those buyers/borrowers who are now facing foreclosure as the pyramid scheme proved them the greater fool.

The lenders were enablers in all of this.  Yes, they profited on each loan.  They are sophisticated financial minds.  They weighed the risk of defaults against the rewards of profits, and opted for profits.

As we examine both the lenders and the borrowers, they may appear different on the surface.  Borrowers are often unsophisticated, first time buyers, financially instable.  Lenders are led by sophisticated, educated, wealthy individuals.  However, as we look past the surface and examine what was really going on, the differences fade.  Both understood that there was risk involved in the transaction.  Both saw the potential for handsome profits.  Both opted to bear the risk in order to reach for the profits.

That the profits eluded them should not mean that the risk should also be escaped.  There is a system in place for borrowers who have borrowed more than they can handle.  It is called bankruptcy and foreclosure.

As the stock market declines reached historic levels in the bear market of 2000-2002, there was outrage over the deception of Wall Street analysts and chief corporate officers.  Many of them paid for their acts in the form of fines, suspension or expulsion from their professional practice, or prison.  Likewise, perpetrators of mortgage fraud should face a similar punishment.  However, no bailout was offered to the investors of Enron, Worldcom, pets.com, or e-toys.  Nor should there have been.  Money was invested with the hopes of profit, and the understanding of risk.

I have great confidence that you, as my representative in Congress, will vote against a bailout in any form.  Families that rented before they stretched themselves too thin to buy a house they could not afford will go back to renting.  Employees of subprime lenders will find other employment.

Privatization of profits and socialization of losses is not good for America.  It will encourage excessive risk taking.  Instead of the boom and bust of a normal cycle, we will have the inflation and bursting of bubbles.

Sincerely,
A concerned citizen

Comments

[D]

Love It!

I posted a link to this fabulous post!My Hero!!

[Kim]

Thank you!!! I'm thinking I should write a similar letter. Ms. Boxer is my senator as well. My husband and I rent, we have owned in the past and lost money. We knew it was risky and only had our selves to blame when it didn't work out. I didn't look to the government for bailout. Nor do I expect them to help me out of renting now, which by the way we do by choice so as not to be house poor. I agree that predatory marketing did not help the situation, but people should definitely be more educated and less susceptible to wishful thinking when they are making the biggest investment of their lives. I could not agree more with your letter, well said!!

[TFB]

That's a great letter. Prudent renters and buyers were shut out by the profit driven bidders. They actually will benefit from foreclosure because they will walk away paying less than what they owe. "Heads I win, tails you lose" is not the American way.

[Bronco]

Way to go! We need as many peoplel voicing their outrage as possible.

[MoneyDummy]

It sounds like a great, well-written letter. I'd like more information: what are the bailout measures that are being proposed, and what are the problems with them?

I've not been following this debate.

[NoFreeLunch]

Bravo well said!

If they had made money with the house, would they pay some back to the government? Hell no!

When the renters 'lost' money when they didn't buy and get into the appreciation ponzi scheme, did they ask the government for help?

I have no sympathy for any adults who either:

1) are the "innocent" types that claim they didn't know what they got into when they sign LEGAL documents. Treat this as your life lesson...

2) are the "savvy" types who used no-doc loans as leverage in their real estate gamble. They are lucky they won't go to jail...

[c]

My sentiments exactly. I don't think it wise to start messing around with the free market economy. When there's the possibility of make a ton of $, there is also risk. The government shouldn't just erase that risk.

[rhbee]

Oddly enough, we appear to have become a nation of people that expects to be bailed out, or at the very least, be televised crying about how awful we feel that we lost out when the bubble burst. Meanwhile, the buyer buzzards are now circling the foreclosure market hoping to make a meal off of someone else's disaster.

[financial freedumb]

Well said. LMG, you are a gifted writer.

I agree. The worst thing government can do is bailout the people who, unfortunately, went in over their heads.

Ultimately, the responsibility lies with the folks who signed for the loan regardless of how much they consider themselves "victims." Now if people were flatout lied to and deceived...that's another story.

Anyway, SHAME on the companies that took advantage of the situation. They should be punished. They know better.

Back to the bailout, who ends up footing the bill? Everyone...And I wouldn't be surprised if the fallout from a bailout is another set of "victims." This time due to the government trying to save one group of people, hurting a bunch of other people.

[Deborah]

I like seeing an opportunity to comment on this. Here is a piece I wrote on this topic a couple months ago. If they do something in law, it should be to prevent this kind of stupidity.

I worked in banking I saw first hand the devastation of a local housing bubble we had here in BC in the late 70s, early 80s.

I remember the loans officer joking at the time that you needed a husband, wife and mistress to qualify for a mortgage. That was at the height of our bubble, when housing prices had gone up more in BC than any where else in Canada, just in time for that enormous interest rate spike. I worked in bank and saw people lose their homes.

It was while working in banking that I first started studying the enormous power of compound interest and all the effects of changing rates on mortgage payments.

I'm not sure how it came about, but in Canada low down payment mortgages had to be insured after that, so a 5% down mortgage also costs 2.5% mortgage insurance. This isn't to protect the consumer, but more the banks.

Legislation that would protect the consumer would be lending laws that limit the amount a consumer can borrow based on a fixed evaluation of income, down payment, amortization period and interest rates.

I have a 4.4% interest rate mortgage.

Qualifying for a mortgage should not be based on current interest rates. The leverage of the potential increase in payments is utterly enormous when interest rates are down, and the amount of money people quality for at low interest rates is insane. I qualified for 127% more mortgage that I borrowed for interest rates at 4.4%. If they'd been 3%, well, then I'd have qualified for 233% more than I borrowed.

Qualifying for a mortgage should be based on being able to afford the payments with 30% of your income with 25% down and 8% interest for a 25 year mortgage. I'd have actually only qualified for 15% more than what I borrowed with that criteria.

So, then comes the fudging factor. Zero down loans are fine, if you afford them with 30% of income at 10% interest. I'd actually have maxed out my borrowing power without a down payment using this criteria.

And there's nothing wrong with having it go the other way, say 30% of income at 6% if you have 50% down. Under this criteria I would have qualified for about 65% more mortgage that I took based on the interest rate, but I would not have qualified for this measure because I did not have half down.

The actual term of the mortgage should be based on the criteria given. You have a 25 year mortgage at 8%, but with current interest rates you will pay it off in x-years.

Anyway, I've gone on for years that allowing these mortgages shouldn't be allowed, and indeed, even with our stronger laws, I think a lot of people are probably still going to find they are in big trouble even in Canada. I can't imagine having had a mortgage more than double what mine started at and facing an interest rate increase.

Check out the following blog for an excellent read, http://thehousingbubbleblog.com/"