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
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