Subprime Restructure Resistance – How Much Is Punishment-Driven?by Brad Warbiany
It’s clear to everyone with reasoning ability that our subprime mess is, well, a colossal mess. We’re talking about a credit bubble that’s enormous, and the fallout of a big-time POP will put our nation into the question of major recession vs. hyper-inflation.
This is not a good thing. This is not good for the American people, this is not good for homeowners, this is not good for lenders, this is not good for economy in general, and this is not good for the government. Investors and lenders are already feeling the effects, as you see major mortgage companies writing off billions of dollars of losses. This is not good for homeowners, as many are facing foreclosure as their payments reset to rates that they can no longer afford. And it’s not good for the economy, because a major credit crunch will shut down the engine that allows us to escape the effects of this downturn (albeit only temporarily, but that’s a factor of our screwed-up monetary system in general).
I personally believe that while this is a bad situation, there are things we can do to minimize the downturn. One of those things is for lenders to take a pro-active approach to people who took on bad loans and are facing foreclosure, in order to find a way to restructure the loan to terms that are acceptable. This is obviously a good thing for the borrower, as they can meet their current payments and a restructuring allows them to keep their home in their possession and keep their credit rating intact. This is also a good thing for the lenders, because in a stagnant or downward housing market, foreclosures are a losing-money proposition for the lender. Foreclosing on a house, holding the property for several months or taking a huge loss on the sale, and then also forgoing the future interest on the loan is a pretty big downside for them. For investors, a restructure is a bad thing, but potentially a less-bad thing than the lenders failing and their investments becoming worthless.
Yet there has been a lot of resistance to such an idea. And while I hate to say it, that restructuring appears to have some desire for punishment, rather than a desire to help people work things out, which I find troubling. A few examples:
Second, in part because of the housing bubble and in part because of simple bad decision making, people were buying houses they really couldn’t afford and entering into loan transactions that were not in their best interest.
Now, all of those quotes came from one post and one comment thread. Taken individually, none are really all that noteworthy. But taken together, there’s an underlying thread of anger and scorn there that is rather troubling.
Don’t get me wrong, I’m very worried about the aspect that government brings into this mess. I think the term “bailout” is still premature, but I worry that if lenders don’t follow the government’s “suggestion” here, that they’ll quickly move to a more active role. There are definite problems with the government getting involved in this mess.
However, the negative reaction to a restructuring of loans is something that I’ve noticed for at least the last month or two, even before the government aspect came into the picture. There seems to be an underlying punitive aspect, as if these borrowers and lenders should simply have to feel pain due to their decisions, even if there are reasonable ways to avoid the pain.
In this deal, there were a lot of culpable parties. Borrowers were buying houses that were going up in value, so they had some (perhaps bad) belief that they could sell and get out if things got bad. They were buying the loans from brokers, many of whom were getting paid more to funnel borrowers into these “creative” loans, and who also were selling those same loans on the back end, so they had no incentive to make sure the borrowers were creditworthy. The lenders did relax standards for loans they were buying, but at the same time they were simply slicing-and-dicing those loans into CDO’s and SIV’s and selling them on a secondary market, spreading the risk out to people who were willing to take it. And this was all underwritten by loose monetary policy borne of a government that was searching for anything that might take it out of the post-9/11 slump.
Lenders and borrowers have a potential way out of this mess. And if they are able to stabilize the situation long enough to turn a sharp housing crisis into a long housing stagnation, the wider economy might at least avoid some major unpleasant shocks. But it seems like some individuals are SO focused on the punitive aspect that they would rather watch the whole mess come crashing down than support individual lenders and borrowers do what they can to avoid it.
Again, I’m somewhat conflicted on this issue. Since selling my house for a whopping three-figure profit earlier this year in order to move to California, I’m stuck in a tiny apartment with a wife and baby, hoping that there is a major housing crash so I can afford to buy a condo. I want there to be enough pain that prices come to a point that allow me to get into the market, which is something I cannot do right now. To do this, we need a serious correction, not just a protracted stagnation.
Yet I still don’t understand the desire that some people have to watch people get thrown out of their homes and their credit ruined. I understand if they made bad decisions so egregious that there is no recourse, but these are mostly people who are making their current payments and just looking for a way to avoid watching their whole world come crashing down. And the lenders are absolutely hoping that they don’t have to foreclose on wide swaths of property, because they know that they’ll lose their shirts in that sort of market.
It’s not a good situation. But why do so many people want to see punishment, rather than see voluntary agreements between borrowers and lenders that might allow lenders to stay afloat and families remain in their homes? I realize that we are conservatives, and we don’t want to see people insulated from the consequences of their actions by government action, but so much of the reaction that I see seems to be a desire for punishment, rather than understanding. America is a land that values fairness, but it is also a land that values compassion. Why have we swung so far away in this case?