Friday, November 14, 2008

$700 Billion Mistake: Won't Help Foreclosures

A few weeks ago, I wrote something about the $700 Billion Bailout. I was driving to work one morning last week, and I heard something about how the first chunk of change was going to help people fend off foreclosure. Now, perhaps the money will help loosen up some business credit, but I would like to dispel any notion of this money helping struggling homeowners.

I mean, most of the people who have their houses near disclosure are living close to the edge. I mean, if they weren't close to the edge, they would be making their home payments. Make sense?

But let's look at this from the point-of-view of someone who doesn't have very good credit and is making a house payment. To make this example concrete, I am going to make up some numbers. Let's say a family of four purchases their dream house a three years ago. They pay $200, 000 for the home, which is at market prices for the time. Maybe before the market crash, the homeowners looked on Zillow and saw that the house appreciated to $210K (5% in one year!). Now, however, the house is worth about $150K. The people made payments, each payment, at the first of each month. Now, they look at the equity they have in the house, and they are up-side-down. Perhaps they now owe $195K and the house is worth only $150K. The homeowners don't have good credit, and now they can either bail on the house, or keep paying on an asset that is depreciated and probably will not appreciate anytime soon. Not-stellar credit and even if you take a major hit on your credit, it gets forgotten after 7 years. If the homeowner keeps paying, it is not certain that in 7 years, they will be in better financial shape. Sure, the bank can sue the homeowner for the difference between the amount owned and amount the bank gets after foreclosure. But will the bank get anything from the person walking away from house? Doubtful.

Now the auto industry wants only a sliver of the $700 Billion. The problem, however, with the auto industry is that they are bleeding billions every quarter, and their business model is not about to change anytime soon. I don't really know if this is true, but some PhD on NPR said something to that effect last week.

Anyway, we are spending tons of money to fix a problem, and what we are doing is paying for bonuses and paying to solve rich people's problems. This is Medicaid for the rich, pure and simple. And we don't want to know.

Guess I will open my 401-K statement. That is something I have been putting off.


Johnnie Avocado said...

I'm not an economist, but I have a big problems with all these bailouts. We are in a time of huge CEO overpayment. ...and these Golden Parachutes, all this money is just going to help the big wigs make off with some cash. I get frustrated when I realize that, I did what my parents taught me, and bought a house I can afford, and now my taxes are going to help some yahoo who bought a 700K house on a 44k a year salary. Leesa, you're getting me goin'!

~Deb said...

Your comparison with the bailout being similar to Medicaid for rich people is right on. Then you have these "yahoos" that are telling people that if the rich get bailed out, they'll have money to produce, making costs lower all around for middle-class people and creating more jobs which in the end, we will see the same results.

What do you think about the "rich man theory"?

Anonymous said...

Oh, boy! Anonymous comments are back. Now I can make inappropriate comments and I don't have to worry about you ever figuring out who this is. But I don't have time now since I'm off to have anal sex with Asian schoolgirls before the Earth is destroyed by Giant Atomic Chickens™ in accordance with Satanic prophesy.

Grant said...

The bailout is not addressing the real issue and may even encourage more companies to fail. "Hey, look - if I bleed my company dry, the government will reward me with more money. Woot!"

And whoever left the last comment is clearly deranged.

Leesa said...

johnnie: yeah, I have a house I can afford as well.

~deb: rich man theory works for the rich man.

anon: grant, are you a tad bit jealous about my stalker? I have a psycho hot lesbian stalker? na-na-na

grant: I figured the last comment came from NY, but I was too lazy to check it. We are rewarding people who give money to politicians. The American Way, baby!

LarryLilly said...

I have cash on hand, and I am hoping some ones ill fortune will be my find.

Cynical, yes.

But back in the late 80's, I was in the role of the seller needing to resolve an IRS debt. they demanded I sell the house, on what they called a 30 day sale price, which my agent told me was that something near 20 percent off market value unless I could find a full price seller in 3 weeks. Closing was to be within the 30 days of the IRS demand. I found someone that bought it for 15% off. They were at the closing, they got their share first, I got what was left over, a small amount for 15 years of living in a house I built on my land for my forever. The only house my daughter knew until we uprooted her and my sons and then three months later she killed herself over all the tumult of it all. I had some cash left and for the same mortgage I got half the house of what I just sold.

So its my turn now and well, chit happens. I stayed close to the vest, I saved when possible, I got a new line of work in a recession proof job, and now I have cash.

Anyone selling?

Oh, and I am not talking about someones home. No, I am not that cruel, I have been there, and that is not my game. No, I am talking play things, baubles, extras, the other things that people toss away as they wind down the economic path. I am seeking a GREAT bargain on a Recreational Vehicle aka RV trailer. Something extra that someone has, a nearly new one just bought and coupled with a one-two punch this summer of high gasoline prices and job layoffs its now such a luxury. A dealer with excess inventory that needs a sale, now before the holidays.

I am your man. lets make a deal, lets haggle, where is your squeal point, then will you take a little less?

Money talks and welcome to the new money market where savers become king again. I have some cash, what do you have?

Leesa said...

larry: I have some cash as well, but not a lot. I do have a 401-K that is worth about 70% of what it was worth a few months ago. Well, maybe a year ago, actually.

My house value has decreased, but nowhere near the value of my investments. I would rather have had my investments intact than snag some good before-Christmas deals.

Anonymous said...

My mom and I had a related conversation at lunch. She's a WWII era child and heavily influenced by U.S. propaganda at the time.

Why would American automakers do anything different. They build cars that last 5 years. Then they break. They build the business model to sell a car every 5 years. Car owners want cars to last longer, let's say 10 years. If the maker does that he sells half as many cars, but they get a loyal customer. They traded good business for profit and good business brings profit.

Look if your business goes under ... it's because you didn't adjust to the market trends. I'm tired of bailing millionaires at the tops of companies. The little guy will suffer undoubtedly. I live in a town with an auto plant. It will hurt my town.

But it would have been smarter for them to make cars people want instead of begging the government.


btsea said...

I worked at a place where we had monthly meetings in which the CEO would address the rest of the company in the cafeteria. I remember several comments the CEO made.

One was that he like to hire people who had mortgage to pay off--people that were "a little hungry", as he said. Now since he had 4 or 5 cars, I assumed his mortgage was paid off too. So I mean, shouldn't I want a CEO working for me that DOESN'T have his mortgage paid off, that is a little hungry himself??? Hmmmm.....

Another time he gave us a lecture on capitalism--how it was ok to be "a little greedy" and basically if we worked hard enough we would be in his position (what would happen to the low paid line workers)? You can't have a company with 300 CEOs...

And then once he commented about one of the people who had just bought a new car. "I helped buy that car," he proclaimed. Now the CEO had 4 or 5 cars himself, including a Porsche and a Land Cruiser...does that mean us peons helped buy his cars too? ;)

So as far as mortgages go, I have to remember, "yeah, it's good to be a little hungry...I think...well if you say so, I guess!" ;)

Anonymous said...

Everyone has played Monopoly. There comes a point where one person holds everything. They may toss the others a bone just to keep the game going for another few rolls around the board, but basically the imbalance cannot ever be overcome and the game is over. I am hard pressed to see the recent unfolding as anything different than the model of our childhood game. The difference is we have not figured out how to just put the game away and go ride bikes. Leesa, you rock!

Leesa said...

knot: the problem with begging with the government is that the issues are not fixed. It would make more sense for them to make vehicles that are marketable, last more years - I would take 8 years - and have less of a carbon footprint.

btsea: I have read a lot about compensation - had a class on it in school - and there is not a very good coorelation between pay and performance. That is, if you increase performance, you don't really affect pay. I would want to pay people enough so they don't steal staplers.

anon: interesting analogy. Problem is that the government always wants to play (with our money).