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Friday, February 20, 2009

The Coming Mortgage Class War III

This piece, entitled The Coming Mortgage Class War, predicted what is now just starting. It predicted that the process of loan modifications, especially those subsidized by the government, would create a mortgage class war between responsible and irresponsible borrowers.

We will have a class war the likes of which we've never seen. Those that acted responsibly won't merely be jealous and envious, but rather they will be outraged. This will pit neighbor against neighbor, friend against friend, and colleague against colleague. Those with good credit will demand action. They will demand justice and they will demand accountability. I have always believed that there is a silent majority in this mortgage mess. That majority are the folks that have paid their bills on time. For the most part, they want no one bailed out. They were responsible. Others weren't and they won't stand for those that were irresponsibly being rewarded.

Now, in the two days since President Obama announced his mortgage bailout plan this mortgage class war has exploded. The first significant salvo was fired by Rick Santelli in this clip.

The White House responded today.

In Gibbs' response, the White House tried to frame this as a class war between Main Street and Wall Street. (With Gibbs proclaiming the idea that derivatives traders know what they are talking about went out months ago) Of course, the White House will be in for a rude awakening if the folks there really believe that government subsidized loan modifications will be viewed as Wall Street Vs. Main Street. It won't. This plan will be viewed as responsible versus irresponsible borrowers.

Fox News has a story with just a tiny sampling of the kind of resentment and anger we will soon see.

Michelle Fry is a suburban Atlanta homeowner who has seen the value of her modest one-family home drop by more than half in the past year. She now sees a national mortgage bailout plan that appears to reward people who bought more house than they could afford and can't pay their bills. And she has a simple question for President Obama:

"Why am I paying for them?"

"We are very frustrated and scared," said Fry, 32, a newly expectant mother who works as a creative director for a public relations firm. Her husband Sam, 38, is a truck driver for a local printing company. Their combined household income is less than $100,000.

There are a few very important things to keep in mind. First, all of this has really happened in just a few days. Second, the President laid out a broad plan on Wednesday. The details of this plan won't be laid out until March 3rd. Until then, the White House can continue to claim that only those that "acted responsibly and played by the rules" will be helped, and it will be difficult to counter because we don't know the details yet. Finally, and most importantly, most people still don't know just how good a deal some of these folks that get a loan modification will get.

I have seen loan modifications from the inside. The average interest rate is 5%. That's a rather sweet deal considering that you only get it because you can't afford your current rate. One modified loan I saw received an interest rate of 4% for five years, 6% for two more years, and 6.75% for the remaining 23 years. One borrower I am familiar with received a loan modification with an interest rate of 1%.

There is just the simmering of anger now. That anger will explode and spin out of control once responsible borrowers are able to wrap themselves around just how good a deal these loan modifications are. Keep in mind that loan modifications are predicated entirely on ability to pay. Often times, someone is so underwater that they only have the ability to pay if their loan balance as well as their interest rates are reduced. Furthermore, any loan that is underwater, one in which the balance is more than the value, will be brought down so that the two are at least even. What's more, imagine how one might feel when they realize that they don't qualify because their credit profile is too strong. That's the crux of the class war this process of loan modifications will bring. If you have been on time, and your finances are in order, you will be denied a loan modification. In other words, the person that overbought will be the one eligible for rates as low as 1% and reduced mortgage balance, meanwhile, all you get is the going rate on a thirty year fixed.

Make no mistake, the mortgage class war is about to begin and this one will be ugly, very ugly. This ludicrous notion that we reward the most those that were most irresponsible. We give them deals better than for those that are responsible is not without consequences. One of many of these consequences is the mortgage class war that has officially begun.


Unknown said...

You have hit the nail on the head.
We have to be heard.
Join Facebook group:
Tea Party 2009 - Mortgage Bailout OPPOSITION

Anonymous said...

Rick Santelli for President. At least he represents Americans.

Anonymous said...

Again, the context of this plan is a massive collapse of our housing economic center. And there are lots of reasons why someone might be struggling with mortgage in the current economic climate besides a case of them being "irresponsible." It's not so simple and black-and-white. I know, in your philosophy the well-off must in all cases be virtuous and noble (as evidenced by the fact that they are wealthy--that means they are moral). And in your philosophy the poor or stuggling must be immoral and weak. But in the real world such a clean-cut dividing line does not apply so neatly. For instance, many folks might be struggling after being laid-off, as millions have been so far in this catastrophe. You would give him no unemployment benefits, and no help whatsoever. You would say to all such people "eat dirt and die." I say, why not help people in that kind of situation--what is the point of kicking families in that kind of situation into the street.

mike volpe said...

That "massive collapse" happened because lots and lots of folks got loans they never should have. These people overbought.

I have the benefit of being in the business for seven years.

Now, there are all sorts of reasons that someone can't pay their mortgages. Yet, ultimately, someone that is paying on time won't see them being bailed out as anything but irresponsibility.

I am not judging. I am in no position to juddge. I am telling you what those that have paid their bills on time will think when someone that hasn't gets a bailout.

Anonymous said...

As I read the plan, it seems they are actually going to try to focus on people who are paying on time, but are in danger of falling behind. Sure, some borrowers were "deliberately irresponsible," but the vast majority are folks who didn't know what they were getting into, and not being financially saavy like the bank people just assumed that house values would continue their decades-long climb, and so were finessed by bankers who should be more knowledgeble into taking on subprime loans. If the plan being proposed focuses on getting them to pay at a reasonable rate they can afford, then I say why not. I would say why not even if I had my own mortgage, and was paying it without trouble, etc. I mean, what's the point of pushing massive numbers of families into homelessness, when foreclosures can cost banks more than doing the renegotiation of the loan. This plan if implemented correctly should indirectly have stimulative effect on the economy as well.

Anonymous said...

"You have hit the nail on the head"
that's what every body need.

Anonymous said...

Very interesting.

I have stumbled across an interesting article that looks at the current banking crisis and compares it to previous banking crises around the world and looks at the likely effects on the economy based on past information.

The article is titled The Banking Crisis - Where are we now? and makes for an interesting read.

Anonymous said...

The modifications aren't awarded to people who "bought more than they could afford" or who "signed paperwork they didn't understand". The modifications are granted to people who were qualified for the loans they received and were paying them fine until they endured a hardship (i.e. loss of income, loss of job, terrible illness, etc.).

Holier-than-thou people who are griping about "why is Johnny getting something better than me just because he was more foolish" need to step back and take a look at the true circumstances.

Are you willing to endure a job loss, just so you can have a temporary loan modification? Are you willing to endure a loss of 50% of your income and take all the panic and and never-ending stress that comes with that, just so you can have a temporary loan modification? Are you willing to get cancer, or get your leg accidentally ripped off under a bulldozer, just so you can get a modification?

The people who are getting these modifications (which are only temporary mods, by the way) have gone through unexpected and HORRIBLE experiences, and are faced with losing their sleeping place because of the horrible experiences.

So if you have gone through something horrible, then by all means call your lender and apply for a mod and then you won't have to be jealous of the other people doing it. But if you HAVEN'T EXPERIENCED a horrible life-changing event or loss of income, then quit griping and thank your lucky stars and thank GOD that you are still having a good life.

Anonymous said...

By the way, the modifications aren't the huge financial benefit some complainers are making them out to be. Each modification also extends the length of the loan, to at least 30 years or possibly 40.

So pretend you took out a 30-yr fixed 3 years ago. Then you lost your job, paid your mortgage with credit cards to keep it current, and finally found a new job but at a 40% income reduction, plus now you have a credit-card cash advance to pay off. Pretend your servicer reduces your monthly $1000payment to $750 for the first year, $850 for the second, $950 the third, then back to your normal payment. Well, that means getting the mod saved you $5400 during the first 3 years. But now you have to make payments 3 years longer than you would've otherwise, i.e. paying an extra $36,000 out-of-pocket. So in the long run the person who gets a modification actually spends more... it's just spread out over a longer period so it's less each month.

All the people who are jealous and griping should think about the numbers and realize that they are actually getting the best deal by staying in the loans they currently have if they can afford them.

The people who can't afford them because of hardship are getting an alternative payment plan (a mod) but are paying for it in the long run.