This is a pretty sweet deal. For the banks I mean. For the homeowner and taxpayer, this sux ballz.

Milk The Poor, They Don't Know The Difference!

 

The loans are fixed rate and therefore not "predatory lending". The definition of "predatory lending" isn't loaning more than the house's value... it's lending at a low teaser rate to make people believe they can afford a more expensive house than what they really can afford.

 

Predatory is in the eye of the beholder. Taking someone from a debt they can walk away from, going to one they can't, for MORE money, that they are more likely than not to default on, is not exactly a neighborly thing to do.

 

I'm not sure what else they should expect...

They bought a $400,000 home, and the only way they could afford it was with a teaser 3-year ARM rate. What would happen to these people if the government didn't give this option? They'd really only have one other way out: default on the mortgage, lose the house, take the massive credit hit. I guess they could declare bankruptcy, and their primary residence would be 'safe', but credit would still be screwed.

So, in recognition that a large quantity of home values (which is a large underpinning of the "common" wealth in this country) have tanked, they're offering another option to keep your house. They aren't forcing it on you, but they're giving you another option -- an option that nobody else would be willing to give, and oh by the way, with a decent fixed rate too.

Predatory lending was selling people houses that are 5x their annual income on an ARM loan to make it barely affordable. Shame on them for not realizing the cost would go up, and shame on the lender for even making it an option. I don't see this as predatory, because they certainly have other options. But given the situation they're already in, this is probably the 'best' option they really have at this point.

As an addendum to the above, the article gave the example of being able to walk away from the home (in the state of CA) with the bank's only recourse being the sale of the home. Then the article uses this as an example as to why loaning these folks money would be somehow considered "predatory" because they could've just walked away.

Problem is, whether the mortgage lender has 'recourse' or not, their credit will be in the gutter after walking away. Where are they going to get another home loan? In fact, where are they going to find another house in CA that isn't a 400 mile round-trip commute that's really any more affordable? Yes, they could walk away, but then they'd be back to renting at best, and hell even rental cost may not be much less (if at all) than a 30yr fixed mortgage payment at 5.75%... I can't imagine walking away being considered the better of the two options, unless of course you're just ridiculously upside down on the loan -- which, again, they might be, but what are the alternative living conditions going to be like after their credit takes a hit for a defaulted mortgage?

 

No, "predatory lending" has a actual definition. It doesn't just mean "screwing someone over".

The whole point of the program is to fix the economy by giving people a reason not to walk away. The purpose isn't to hand out free cash. People walking away from their bad decisions is half of the reason why we're in this mess. The other half is the banks that made the loans in the first place.

How are they more likely to default on it? Most people will see a decrease in their monthly payments due to a substantial decrease in their interest, plus the fact that their loans will now be fixed instead of variable.

Seems to me that you just have the opinion that anytime the government does anything involving our daily lives you believe it MUST be a veiled attempt to take away our freedom.

 

Not veiled, usually. wink1.gif

There is a better-than-even chance that the people who have renegotiations on their loans will default again. The renegotiation only delays the inevitable for the majority of homeowners in trouble. The difference is, under one of *these* plans, they could not only foreclose on the house, they could take your car(s) in the garage and all the other stuff in your life, and leave you literally penniless instead of just in a really tight spot.

What the homeowners *should* expect is to be out on the street. What they *do* expect is for "somebody" to help them out of a mess they got themselves in. The gap between those expectations and reality is several generations of dumbing-down by the government school system, which was never intended to educate children into smart people from the beginning (so it is now a success).

Fixing the economy starts when the people who should be renters because they have habits of making bad financial decisions are turned back into renters because nobody will sell them a house at any rate. Then housing stabilizes, and the economy can pick back up. Sorry to break it to anybody laboring under the impression that the people in charge (those who made the mess, basically the whole legislative & executive branch, plus the financial sector) can fix the mess we are in, but they can't. The best thing the government could do for the economy is shut up about it and let the sinkers sink, the swimmers swim, and the renters rent.

Throwing our money at a problem more likely than not to get worse, while giving customer-unfriendly companies ever more power over the poor poor pitiful poor people is *not* my idea of the proper role of government.

One reason I like to read Michael Shedlock's Global Economic Analysis is that he knows what he is talking about. Another is that he can tell what is happening in terms you can understand. Here's the first hit I could find on redefault rates. RTWT:
http://globaleconomicanalysis.blogspot.com...e-on-prime.html

 

I don't necessarily disagree with your "let the sinkers sink, and the swimmers swim" paragraph -- I know I was (and still am) toting that same line when all the hojillions of dollars were being poured into the banking system when it went tits-up.

I was more just defending this as being something other than predatory lending. And while the potential walk-out rate is still high, there will be more people (how many more, I don't know) who will make good on the loan versus had no capacity to do so in their old loan. Saving a few can help, saving them all will never happen. I'm relatively 'meh' about it either way - why spend that much money on a house you could only afford on an interest-only loan? Duuhhrr...

 

Gotcha.

Some people are not smart enough to care. Neal Boortz used to be a lawyer and he says sometimes he would be at a closing where they would have a buyer read specific portions of their closing contract like that whole "I will pay this" part and "the interest rate can change" bits as well. Then, when the should-be-renter stopped paying and tried to say 'nobody ever told ME xxxx' Boortz's client would replay the tape for the Judge and win in court.

 

I actually recall reading a quip exactly like that somewhere, but cannot recall from where... Good stuff nevertheless!