When screwups get benefits that others don’t
By Brian Kirwin | Tuesday, January 13th, 2009 | PolicyThese are the stories that make people (a majority, by the way) angry for doing the right thing.
Virginia’s Attorney General’s office (yes, our GOP nominee for Governor) announced that Countrywide Financial Corp. will slash interest rates and convert/refinance troubled mortgages. Countrywide was acquired by Bank of America. Virginia was the 32nd state to join the settlement. Read the story in the Virginian-Pilot.
Here’s the funny thing! Credit is so tight right now that several close friends of mine have been denied refinancing to lower rates, and they are in absolutely no danger of foreclosure.
They didn’t buy more house than they could afford. They didn’t jump into some “sounds too good to be true” mortgage scheme. They bought their houses. They have an interest rate that is reasonably higher than what interest rates are now. But with decent credit scores, can they jump on the lower rates and lower their expenses? Nope!
But if you’re not making any payments at all and are teetering on foreclosure, you can get a sweet fixed rate refinancing, elimination of late fees, and the helping hand of government along the way.
Almost makes someone want to stop paying a mortgage, get in trouble, so then they could get the better interest rate that they couldn’t get when they made payments.
It makes no sense. How can someone who is making payments at a higher rate NOT QUALIFY to make lower payments? Isn’t the fact that they’re making their current higher payments proof enough that they can afford it. How can someone not qualify to pay less?
If government is going to require sweet refinancing for people who got in financial trouble, how can they not require the same deal for everyone.
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The right wants to jeer him. The left wants to censor him. Moderates usually want both. Brian Kirwin is a political consultant and public relations strategist in Virginia Beach with a lightning-rod flair. Brian also serves on the VB Arts & Humanities Commission and frequently appears on Hampton Roads theatrical stages, if only to prove that all actors aren’t liberals. Kirwin’s columns stir up debate and hit the political scene with no punches pulled.
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7 Responses to "When screwups get benefits that others don’t"
Good points, the only reason I see is that giving everyone that privilege would mean even bigger government. Still it would be more fair. How about we do away with banks lending at interest and have government completely control the issuance of credit. Granted that could be disastrous, but if men were angels it would be the logical thing to do. Lending by institutions at interest in morally wrong.
It’s the same logic that allows large corporations that screwed up monumentally to get bailout funds while small businesses have no access to the same funds.
Why should they continue rewarding bad behavior? How about two tiers of interest rates. The lowest one would be for people with good credit who pay their bills and the other for those who have bad credit and don’t pay their bills.
Max S,
“Lending by institutions at interest is morally wrong.”
Please explain what you mean by this statement. How is lending money with interest morally wrong? The lender is giving up the use of money for the time being so that someone else can use it now. There is a price for that and that price is interest. Charging interest is no less moral then the grocery charging you for having to give up its food to you.
Thanks
It’s a question of the value of one’s collateral.
Joe is in trouble. He has a house he bought on a really confusing 5 year ARM. It had all kinds of extra words like index, Libor, and margin. He started out paying 1k a month, but now the payment is 2k. The initial price was 300k, but the loan balance is now 314k, and the house is only worth 180k at auction.
Next door, Frank has been faithfully paying a 20 percent down fixed rate mortgage on his house for five years. He owes around 222k. He would like to refinance into a lower rate with the same terms. Excellent credit, but the bank won’t give him a loan. Unless he puts more skin in the game, like about 42k to match the auction price. All in all, Frank will have 102k of his own money invested in a house that is only worth 180k and he still has all those years to make payment. Then the city is still assessing taxes near the purchase price.
So is the bank and government going to help Frank? He’s been making payment on the terms agreed. Joe on the other hand, is going to cost the bank 194k of their money if they let him go into foreclosure, eventually forcing government to lower their RE tax base and raising taxes to make up for the lost revenue to pay for their own debts.
When this mess first started, they would have taken Joe’s house. Foreclosure then would have only cost the bank around 40k. But as the Joe’s multiplied, the realized value of the auctions got less and less. Then the feds got involved and started throwing trillions around. But Ben and Barry’s Bailout is not what scares me so much. That’s just kicking the problem down to future generations. The more immediate problem is the state and cities with municipal debt that can’t be deferred, or like Frank, can’t be refinanced.
Anyway that’s why Frank can’t get a loan. The question is, why would he want to?
“Joe on the other hand, is going to cost the bank 194k of their money ”
That should have been 134k plus 25 years of interest on their investor’s money.
7500 Hampton Roads ARMS reset last year. Can you imagine how much money would have been lost just in this area if they had all FC’ed? Add another 5000 this year and next year and the year after that all the way to 2013. That’s the real ARM issue in this area. But there still is plenty of money for Town Center. Wanna bet?
Those are good points Darrell. The banks stand to lose far more when home owners walk away from their mortgages and leave the bank with a house they can’t sell because the market is so bad and the new rules imposed have dried up credit, thus reducing the pool of buyers.
In order to seel (move) the foreclosed properties banks will reduce their market prices and thus – the banks lose.
The homeowner paying their mortgage is not a problem for the bank. Well, not yet. As long as they keep their jobs or the business the homeowner owns is still profitable (not likely) and THEY can still afford to pay their mortgage.
Face it, the wheels have come off the wagon and for many homeowners that are still paying their bills on time, they may find themselves next in line when their income is dramatically reduced as a result of the failed economy/banking system.
It is all a house of cards built upon a foundation of debt.
EJ, lending at interest is morally wrong in a fractional reserve banking system, should have clarified that. In a fractional reserve system such as ours somewhere around 90% of the money supply is created through debt. If all the debts are repaid there is no money in circulation, but the catch is all the debts can NEVER be paid. The application of interest means there is always far more money owed than in existence so the financial system is inherently inflationary. This is a hidden tax on the people and by design transfers real wealth to the top of the pyramid. In loaning you 5 thousand dollars the bank is able to make an extra 45 thousand dollars in loans on top of that because your loan creates a deposit which is then accounted into the banks reserves. Banks should not have this right as they can do nothing but abuse it and create disastrous inflation.
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