Is Congress crazy?

[cos]

Problem: A lot of banks, insurance companies, and other financial institutions are in trouble, and if a bunch of them fail the economy will suffer severely. They're in trouble through a chain of stuff that starts with a lot more mortgages failing than were expected, and a bad housing market. When someone can't make their mortgage payments they may be forced to sell the house, but in a bad housing market, their house may not be worth enough anymore to pay off the mortgage by selling it, so they can't do that. Glossing over a lot of the stuff in between, and ignoring for a moment the legal changes that let this happen, that's basically where the problem begins at the moment, yes?

Now, assuming that we decide that we can't afford to let all these financial institutions fail, and assuming we decide it's worth spending several hundred billion dollars on it right now - rather than argue the merit of those two points, let's take them as a given - assuming all of that... why would Congress even consider using that money to bail out the financial institutions directly?????

We could take the same money and spend it on bailing out homeowners who can't make their mortgage payments.

We could get more bang for the buck at first pass because we wouldn't have to buy all of the "bad" debt, only enough to make it possible for each homeowner to keep on paying, perhaps with lower payments over a longer period of time. Banks would be stronger simply because all this debt would no longer be poised to fail, and confidence in the banks would recover as soon as the plan was passed, even before actual homeownwers were bailed out, because people would know that a lot of these loans would no longer fail completely, because they'd qualify for the bailout plan. Not only would we save banks, but we'd save jobs, neighborhoods, and families. By preventing mass dislocation of people we'd be saving lots of other pieces of the economy at no extra cost.

I've heard some arguments against the "moral hazard" of bailing out people who took risks that didn't work out... every single one of those arguments applies to a much greater extent to bailing out financial institutions who took vast amounts of irresponsible risk, who risked not just themselves but everyone around them, who were paid to understand finance and to know better than to do this, who lobbied for laws to make it easier for them to do this...

In what bizarre reality does it make any sense to even consider bailing out the financial institutions instead of the homeowners in trouble?

I'm going to call my members of the House and Senate and I hope you call yours.

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Comments

[dilletante.livejournal.com]

Someone living in that house, however, who doesn't want to move, gets a lot more value out of it than the $20k it's worth to other people, and would therefore be willing to make payments to stay in that house that are higher than what you could get if you took the house from them and resold it.

i doubt that's true in the general case; otherwise nobody would ever foreclose on a mortgage. they would always cut a deal to keep the payments trickling in.

[cos]

I can't fathom how my statement implies yours. No logical connection from one to the other comes to me.

[mrf-arch.livejournal.com]

You stated that "Someone living in that house, however, who doesn't want to move, ... would therefore be willing to make payments to stay in that house that are higher than what you could get if you took the house from them and resold it."

So having just stated that the current homeowner will always pay more than the bank could make on a foreclosure sale, I think you did, indeed, just argue away the existence of foreclosure.

Of course, some people would probably just as happily default, because they're not compelled by sentiment to stay in a place when they could move somewhere cheaper in a time of falling markets, so any bailout plan for individuals would have to address a way to compel those people not to move.

[cos]

"So having just stated that the current homeowner will always pay more than the bank could make on a foreclosure sale, I think you did, indeed, just argue away the existence of foreclosure. " Huh? How?

Banks do lose money on foreclosures.

Also, I did not state that the current homeowner is always willing to pay more than the bank could make on a foreclosure (though that is very often the case), I stated that the current owner is (on average) willing to pay more than other people would, if they can afford to, and if they want to stay there.

I did misstate one thing: payments "that are higher" isn't necessarily it, only that over the long term they'd add up to more for the bank. That is, the individual payments may not be higher, the value of what's paid over time is higher, is what I meant.

This is particularly true in a situation where this is happening to a lot of houses all at once: the more foreclosed & re-sold, the lower the value of all houses, to everyone, so everyone loses out.

[dilletante.livejournal.com]

Banks do lose money on foreclosures.

hm, i think that's a different issue. i'm wouldn't be surprised if on average, loans that go into foreclosure wind up losing money for the bank.

but here we're not talking about the loan as a whole. here's a bad loan, the bank has already decided it's a loss, the question is not "are we going to get our $100,000 back plus interest?" the question is "are we going to get any money at all? and how do we maximize the pittance that we do get?"

it sounds like you're saying that, at least if only there were some way to keep pressure on the homeowner to continue making payments as best they can, that would always produce more money than foreclosing. and i'm saying that, if that were true in the general case, the rational bank would never foreclose; it would always opt for the "figure out how to keep pressure on the homeowner while keeping the loan from defaulting" method. because (you say) that would yield more money.

perhaps you mean that there are some special market conditions that make that true right now, which do not generally hold? or, perhaps, that the government is uniquely positioned to keep pressure on the homeowners to make payments despite separately arranging for the loans not to default?

[cos]

Okay, I see what you mean now. Yes, I think that legislation can change the balance on that decision, converting a lot of what would've been foreclosures into restructured mortgage payments, by applying only a relatively small amount of money - enough to make it possible for the owner to continue. This would add more to our economy because it's not just the bank that benefits, but also the people living in the house (and their employers, their family who might otherwise have to help them out, etc.)