Friday, October 31, 2008

No good deed goes unpunished

The US Treasury department is readying a $40 billion bill that will help bail homeowners out of mortgages that are way beyond the current value of the houses. This leaves those of us who borrowed responsibly scratching our heads wondering where our free lunch is...

Example A: John Smith buys a house for $800,000 and the resulting mortgage payment is 60% of his income including bonuses. The house is now worth $400,000, but John isn't getting any bonuses, so he has missed a couple payments and is considering walking away from the house. This bailout could lower his mortgage as low as $380,000 so he does not get foreclosed on.

Example B: Mike Jones bought a house for $400,000 and when its worth went to $800,000 at the height of the boom, he refinanced and pulled out $300,000 of equity and bought a couple BMW's and went on a few trips to the Caribbean. Now he owes $700,000 on a house that is worth $250,000, and is having trouble paying because his wife lost her job. This bailout could lower his mortgage as low as $237,500.

Example C: Joe responsible bought a house for $250,000 and the resulting payment was 23% of his income. His wife recently lost her job, but they can still easily afford their payment since it is such a small fraction of their monthly income. His house is now worth $150,000. This bailout would give Joe Responsible absolutely nothing.

Joe Responsible is intelligent, and understands that this bailout will help him indirectly by preventing a shit-ton of foreclosures in his neighborhood, and a further downward spiral of the national economy. But that doesn't really help soothe the sting Joe feels when he sees irresponsible greed being rewarded while frugality is quietly ignored. Maybe Joe should become part owner of all the equity being freely given to the mortgage crisis "victims".

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