Brainstorming the Bailout

I heard John McCain’s address where he discussed the current financial crisis. I was very happy to hear that he wants to create proactive measures to ensure banks remain solvent and help people continue to live in their homes.

He very clearly pointed out, and I agree with him, that the root of this crisis is the mortgage industry.

But while the American Dream to some is being able to buy a home, I really have no desire to buy fractions of other people’s homes without getting any equity in them.

One of the big contributing factors, in my opinion, to this crisis is the practice of issuing adjustable-rate mortgages. They were disasters not just waiting, but eager to happen. (The “interest only” mortgages were sheer insanity, and in my opinion people on either side of those loans should seriously consider eliminating themselves from the gene pool, or at least the housing market, unless they had a darn good reason for doing it — and IMHO planning to sell the house very quickly is not a good reason.) People who want more house than they can afford with a fixed-rate mortgage were able to get what they wanted — for awhile. Lenders were able to make more loans, people were able to build and sell more houses, and all looked rosy, until it all turned red.

I’m not saying that ARMs can’t be an intelligent choice and save a person money. They can.If a person bought a home at the national median home price in June of 2003 from Freddie Mac with the average 1-year ARM rate instead of getting a fixed-rate mortgage, when their ARM was adjusted in 2007 they would have had payments over $150 higher than what they started out with. They’d still be paying a bit less than what the fixed-rate mortgage-holder was, but this is where budgeting comes in. An intelligent person would budget for the fixed-rate payment and then pay the difference between the minimum and the fixed-rate payment to principal, and come out well ahead. But if the reason they chose an ARM was because they couldn’t afford that extra $150….

The people most unfairly affected by these idiotic lending/borrowing practices are those who unwittingly bought into these loans when the stupid/greedy lenders saw them for the disaster they were and unloaded them bundled with other securities. I’m not happy at all that my 401k’s rate of return has went sharply downhill, and I’d sure like to get that money back. But is the best way to get that money back to pay it back to myself?

If we’re going to spend our money or use our national charge card from Bank of China to fix this situation, I’d like to see incentives for lenders to refinance some of these loans into something more manageable (both in price and budgeting ability) so that people can not only keep their homes, but pay for them too. And if the people who have planned so poorly still cannot manage to pay for what they’ve bought, I’d like to see some reform to a foreclosure system that allows people to stay in foreclosed homes for months on end without paying a dime in rent or mortgage payments.

Any other ideas?

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