Subprime Mortgage Bailout Concept Extended To SUV Owners?

Are you sick of hearing about the subprime mortgage crisis? I sure am. But here’s a satirical news story from Patrick.net that even I found amusing – SUV Bailout To Keep America Humming.

Lawmakers in Washington are near final agreement on a proposed $400 billion bailout of SUV buyers. The massive amount of debt taken on by drivers in an attempt to ensure that their vehicles are significantly bigger than their neighbors? vehicles has resulted in millions teetering on the brink of bankruptcy. ?We need to keep these people in their Hummers, at whatever cost to taxpayers? said Treasury Secretary Henry Paulson. Paulson is expected to announce details of the plan as soon as Wednesday, said sources familiar with the matter.

With more than 2 million drivers facing higher interest costs and the possible loss of their oil-company-friendly vehicles if they cannot meet the payments, the future of US overconsumption is at stake. The White House on Friday said it was appropriate to build a ?bulwark? against the SUV sector?s woes. ?After all?, said President Bush, ?it would not be American for us to live within our means and be responsible for our own financial decisions. Those who failed to spend themselves deeply into debt should pick up the tab to keep real Americans riding high.?

While not perfect, here are the ways in which I agree with this SUV analogy:

  1. Stuff is stuff. You have a $20,000 car through a $20,000 loan. You stop paying that loan. What happens? It gets repossessed! You don’t really own that car. You only own the right to use it as long as you make the loan payments. When I hear “they’re taking my home away!!”, I empathize the same amount as if they said “they’re taking my car/iPod/HDTV away!!” (which might be a lot or a little depending on the circumstances).
  2. Mortgages are sold by salespeople. Cars are sold by salespeople. HDTVs are sold by salespeople. I don’t recall any laws being broken here, so what did we really expect from them? Sound financial advice? Unbiased opinions? We never fault car salesmen for painting their products in a good light, we take responsibility if we bought a Hummer we couldn’t afford.

Ironically, there actually are tax advantages for large SUVs when used for small businesses.

Comments

  1. I agree 100% with your first point (and your second, but your first is better). It really bugs me that people don’t realize they don’t own something full and clear if they have an outstanding debt on it.

  2. Excellent point!

  3. I cannot understand why people do not just see this as a market correction. I mean the free market is working right in front of our eyes and no one is sitting back to appreciate the great economic system we have. Sure some people who decided to be gamblers instead of investors are going to get hurt but that is the way the market works; reward the intelligent move, punish the stupid move, and eventually make the majority of people a lot of money.

  4. Geez! I understand and support many of the reasons for a supprime bailout, but an SUV bailout? Gross! People losing SUVs has the potential for a positive impact on a community, unlike what happens when people lose homes.

    I am a renter but I love watching real estate shows on HGTV and thinking about what it will be like to buy a home. However, I get bitter when friends, who put very little down on their homes, start preaching the benefits of homeownership to me. I want to be like, but you DON’T own your home… the BANK owns your home! I feel similarly when I watch the HGTV shows, like “My First Place” and the buyer does a 100% financing and then the Realtor congratulates him/her on being a “homewoner”, again, I just shout at the TV: “You are still renting!”

  5. socialistic tendencies says:

    I agree that a large portion of the blame rests with the person who agrees to buy something. However, there is a reason it’s called “predatory lending” by some people. These companies have taken lower or middle class people and sold them things that in past decades would have been denied to them because of their level of income. There are reasons it’s illegal to make certain claims about medications and to not have nutrition labels on food…because even though you are supposed to know some things are bad for you it’s still unfair to be lied to and swindled into things by companies with multimillion dollar advertising budgets and paid off “experts” (financial, medical or nutritional) telling you it’s okay. It seems easy from an upper middle class perspective to turn down some possibly sketchy deals because we should just know better. But when you are struggling at the bottom of society and someone holds out the snake oil sometimes that foolish ray of hope comes through and sways the emotion. One party needs to play more fairly and the other more intelligently.

  6. There should be laws against unscrupulous lending; where the lender is clearly tricking the consumer into a teaser rate which will double and then some when the consumer can least afford it (once you own a home, you have expenses that you’ve never had before).

    I think there should be safeguards against these mortgages in the first place. Most banks use that 35% number to qualify you for a good fixed rate mortgage. With floating mortgages there should be an upper limit of some kind and maybe another number (50%?), that they shouldn’t be able to go over when qualifying an applicant. This would prevent prevent morgage disasters in the first place.

    But, now that these people already have these mortgages, it seems a little cruel to watch them slowly drown over the next year or two. Not to mention what it will do to the price of real estate and consumer confidence. Now international investors will scoop up our dollar-deflated real estate at bargain prices. I would rather that the government step in where they can and make it possible for people to re-finance.

    I think that most people in this position are looking to refinance by themselves, but may be stuck because of some penalties and restrictions in their original mortgages. These could also be temporarily eliminated by mandate, so that they could get out of their lousy mortgages themselves. I wouldn’t feel any pity for the predatory lender who tried to lasso them in with the teaser rate.

  7. Gosh, I am shocked, SHOCKED! that you can’t empathize with those in financial trouble. Do yourself a favor and google “deceptive lending”.

  8. Independent George says:

    3bean – I think your humor detectors need to be re-calibrated.

  9. In that case, I’d like a dot com era bailout…I believe I lost a sizeable chunk on investments like Pets.com and eToys and I think the general public should bail me out.

    I’m joking of course :)
    -Raymond

  10. Whoops! Guess I shouldn’t read blogs before the first cup of coffee! Honestly, I feel like I’ve heard it all and this could be next. Today, however, the joke is on me!

  11. I think you have missed the biggest point to this bailout.
    While I understand that this is an attempt at humor, and it is funny, especially when you consider the idea of the Hummer, bigger, better, than what anyone else in the neighborhood is driving, compare this to the bigger and better house than anyone else. Sure you can afford a 500k house on a 40k salary, making .5% interest payments for the first six months, but then what.

    As far as owning you house, no you do have title to it, it is yours, you have a deed with your name on it, it is yours against all the world, it is just at the same time you executed a deed of trust giving the bank the rt to take your house if you fail to make the mortgage payments. Real property is different from personal property, like your car. You notice when you buy your car you dont get title to it until it is paid off.

    Now back to the bailout, this is not necessarily about the poor consumer, this is about the poor huge banks that made bad bets and not having to pay the consequences of their bad bets. Why not, because everyone involved is pretty sure that if these banks fail, the repercussions will be far too politically painful for any politician or policy maker to sit back and do nothing. It makes good political sense to sell this as a bailout to those holding mortgages they cannot afford, but that is the marketing of the idea, politician are salespeople too. The entity being protected here is the bank, there are huge amount of capital all around the world at stake, and the interests involved are powerful enough to physically move heaven and earth.

  12. The “Bailout” is nothing like that – it is a bad attempt to resolve a problem affecting a lot of folks who were first-time home buyers tricked into buying MORE house than they can actually afford.
    The “Bailout” is only going to freeze their mortgage for a small minority of them for some period and nothing else.
    For the rest – the bankruptcy courts will be full with their skeletons for years to come.

    What are the differences between buying a house and buying a SUV?
    Many.
    One of them is in the amount of time it takes to SELL such asset and the amount of money involved.
    Try to “flip” a house in a week in a cold market – then you’ll know what I’m talking about.
    Selling your SUV to a dealership outside your “cold market”? I see no problem with that.

  13. I empathize with deceptive salesmanship whenever it occurs. From mutual funds with front-end loads being sold to unaware investors, to the HDTVs that come out of Best Buy bought by people who can’t afford it using their high-interest extended payment plan and with the extended warranty. It’s just not different with a house. In addition, it is unfair to assume that all subprime loans were sold through deceptive lending.

  14. Your Pal, the only reason your SUV is easy to sell to a dealership is because they won’t give you much for it. Of course the dealership will take it, he is taking 30% off and then marking it up to sell to someone else.

    So why not just sell your house for the same 30% off and see how fast it goes. Something tells me that your house will sell in no time whether or not people perceive a market as “hot” or “cold”.

  15. Whether you bail out the banks with Federal money or let them die by their own swords, the basic net effect is the same. The money has to come from somewhere, so it’s either a loss on a bunch of ledgers (dying banks) or its additional “invented money” from the government.

    Admittedly, it doesn’t feel the same, but it’s still the same money. The first method hits a bunch of specific pocketbooks today, the second method hits everyone’s pocket books for the years to come.

    In fact, having the government bail out banks actually has a higher total cost, b/c the extra money drives inflation and government debt.

    But I think BAP has it right here: the political powers involved have too much to benefit from the bank bailout. On top of that, most people don’t understand anywhere near enough about the situation to apply political pressure. This whole Central Bank/Reserve thing is simply not “grokked” by the populace at large.

  16. BAP – I take your point. One thing, though, most of the reputable banks that I deal with (Citibank, Chase, my local credit union) — as far as I can see rarely issue risky mortgages at all. The most risky loans they issue are 3-1 ARMs — at least at my credit union. Now maybe I’ll go check Chase and Citis websites.

    I wonder if there is a place that shows each lenders exposure to sub-prime mortages?

  17. @mimi – so you think $11B in direct subprime loans and another $43B in Collateralized debt obligations is a small issue for Citigroup? I would hope their current website or branches aren’t offering risky mortgages, but they have had their fair share.

  18. This reminds me of a neighbor who was driving around in a brand new Hummer as their house was being foreclosed on. So I guess the neighbor could get 2 bailouts!

  19. Mimi

    Just because your bank does not originate those loans, market and sell them does not get them out of the mess. These loans were securitized into siv’s, and this is another way so many institutions are getting into trouble.

  20. BAP & Gates VP, very good points.
    mimi – google Citibank subprime and JP Morgan Chase Subprime and you’ll get a better idea of the mess the banks you deal with have gotten themselves from the mortgages.

  21. It almost feels as if those who decided not to buy beyond their means are being punished. This sets a very wrong precedence for the Fed and the govt.

    If you bought and it appreciates, you make $$$$$ while the other guy who is renting played safe and did not benefit. If you bought and it depreciates, govt is there to help you…so indulge while you can

  22. Sam

    I believe this notion is called moral hazard by economists

  23. Boo-hoo! They’re going to kick me out of the house that I could never afford in the first place.

    I’m not obligated get out my calculator and do a calculation or two before taking on hundreds of thousands of dollars of debt. I WANTED that house. I DESERVED it. That’s what’s important.

    Where’s my gubment cheese? Gimme!

  24. I couldn’t agree more. The problem is that if your neighbor loses his SUV it doesn’t impact you (the responsible one) much. However, if his house gets foreclosed upon, your property value drops as well. Maybe the bailout is the lesser or two evils. I’m not sure.

  25. I’m all for property values going back to being based on people’s true affordability! Of course, I’m a renter :)

    But if you actually dig through the details of the Bush subprime proposal, and it really seems kind of vague and well…. weak. It’s not even mandatory, right?

  26. I tend to agree that its wrong to bail people out that made bad decisions, but history says the approach of saying “too bad” and watching lots of people get into financial trouble is what led to the great depression.

    I like that the government’s approach so far has been to make the finanacial companies that made the loans be responsible for the “lost profits” and extending the interest rate that people can afford, is it right – no, but at least my tax dollars aren’t being used to pay for it. It’s just a delay tactic, but it may allow a long enough delay that these people can get out of the house for what they paid or if they are lucky, refinance into something they can afford. The positive that is coming out of this is that the banks and instituions that gave loans to people that couldn’t afford them are now paying the price, and hopefully wont make the same mistake in the near future.

  27. it seems as though those defending the bailout are likely the ones who are stuck in the mess….

    its quite simple: if you are uneducated about something and take other people’s advice and suggestions, eventually you are gonna be screwed (buying a home included). as someone else wrote: mortgage lenders are salespeople, they often work on some sort of incentive for selling loans from XYZ company or at XYZ rate. do your homework and you would understand that interest rates fluctuate and an ARM mortgage WILL INDEED CHANGE. thats the idea of it!!

    you buy more house than you can afford, it will be taken away. so now you need to make a decision: you can move into a house that is more affordable, you can become a renter, you can refinance, or you can earn more money to afford your higher payment.

    take some responsibility people

  28. Paradoxically, the bail out really is not meant to help the individuals who made bad decisions (though on the surface it may be so.) The actual bail out is meant to help American financial institutions to regain their credibility/reliability in front of the world financial market. Indirectly, you, me, and everyone who felt that this bail out if ultimately unfair is somewhat “benefited” as the US financial system is not losing its credibilities (yet) to the world, aka, we are not seeing our hard earned money become worthless papers.

    On the other hand, it’s very debatable if this bailout or any rate cut will solve anything, short term or long term.

  29. I agree 100% Why should I (and others) directly or indirectly be footing the bill for others mistakes?

    Somehow in this case, “Not reading or understanding the contract” is being used as a defense? I understand there is predatory lending at fault here too, but I am NOT of the opinion that we need to do whatever we can to keep people in their homes. Tough, you dont make the payments, you lose the home. Simple as that.

    This is only penalizing people like me that bought a lower-priced house than I “Was qualified for” took modest vacations that I can afford, and drive a 7 year old car, rather than took out all my equity, lease my cars, change cars every 18 months and have lavish vacations.

    Punish the lenders for their practices, but either fix my mortgage for 5 more years, or let “market forces” sort things out (which were supposedly good enough to govern those making the loans in the first place and now suddenly are not)

    What rot.

  30. Timothy Denike says:

    Like it or not, people did end up in crappy mortgages and they are defaulting. All sympathy aside, a huge unregulated glut of homes dumped on the market is bad for everyone. A national housing market in distress trickles down into many areas of the global economy. I’m certainly not saying Bush’s response is helpful – but some intervention is required.

  31. Like it or not, people did end up in crappy mortgages and they are defaulting. All sympathy aside, a huge unregulated glut of homes dumped on the market is bad for everyone. A national housing market in distress trickles down into many areas of the global economy. I?m certainly not saying Bush?s response is helpful – but some intervention is required.

    I disagree 100%. Let the chips lie where they fall and do NOT reward inappropriate behavior from either side (greed from lenders, greed from borrowers)

    Having the “right” to pursue the “American Dream” (TM) does not mean everyone else that was more responsible has to come behind and pick up the pieces.

    I hope this does lead to a correction in house prices (I am an owner) but somehow I still doubt it will change people’s behaviors and make them more responsible.

    We cannot simple use the “It’s good for the economy” excuse or “worse things will happen if someone doesn’t step in” every time. People have to learn to accept their mistakes and maybe (shock) go back to renting, or even (more shock) buy a smaller house/condo

  32. For the greater good, we are told.

    With this mantra, the politicians can even legitimise murder.

    I agree that it is cruel to see houseowners being slowly strangled. There will also be terribly negative effects on the economy. Some sort of assistance should be a good idea.

    If and only if, those responsible for this are hung and quartered.

    Sigh! The truly wicked do get away.

  33. This is funny. Can we have some Honda bailout too? I don’t have a loan, but I can get one if they charge me less interest than what I can get on a CD. I can then open a CD, and the bank will get the money it needs; so this will have banks.

    Seriously though, the problem with current mortgage crisis is that it hurts a lot more than some irresponsible/stupid people who bought houses they couldn’t afford or took a risk and got ARMs. As to banks, there are people that work there. Most of these people don’t have anything to do with the loans. When banks loose money they layoff people. When banks loose money they buy less technology and technology companies profits go down and so do raises people who work there get. A few bad quarters and you get layoffs there as well. So it is not just a market correction or bank problem, it is also your next year raise or job. Which is why I don’t feel particularly strongly against bailout. Sure, I’d love to get some breaks too, and it is really unfair, but I’d like to get my next year raise.

  34. “I agree that it is cruel to see houseowners being slowly strangled. There will also be terribly negative effects on the economy. Some sort of assistance should be a good idea.”

    Cool, so I (who got a mortgage of $280K not the $450K I was told I could get) can keep my 4.5% interest rate for an extra 5 years just like ll the “poor sub-prrmies” then ? Oh no, of course not because I “dont need help”

    And to state it like it’s 100% the lenders fault is naieve. How many of these “helpless” borrowers spent the cash on SUV;s and nice holidays and “upgrading the appliances”

    whatever.

  35. In a free-market economy there are losers and winners. Unfortunately for the average american who pays most the bills in this country and has the least amount of influence over the political establishment, the United States has become somewhat of a hybrid. In order to protect the special interest groups that put them in power (Democrats and Republicans) the average American now has to bail out the banking industry because of their greed and poor decisions.

    The banks did this to themselves and they should lose a lot of money because of it. Yes, people on the fringe will lose homes that they could never afford in the first place. The byproduct of this will be lower home prices and thus more average Americans may actually be able to afford a home. This situation is not a bad thing for the country. It is only a bad thing for the real estate interests and the banking industry.

  36. I wonder if there is a place that shows each lenders exposure to sub-prime mortages?

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