Smart Borrower Blog

Should The Market Take Its Course?

Jan 26th, 2009 @ 5:21 PM by Alden Smith

We see that 2.3 million homes have gone into foreclosure, and it is expected that 4.4 million mortgages will be 60 to 90 days past due by the end of 2009.  These estimates come from the FDIC, and although laws in several states have reduced the pace of foreclosure filings, this was not a one trick pony by any means.

The problem is obviously cyclical – ARM’s are resetting, jobs are being lost by the tens of thousands, and the economy is ruined by lack of consumer confidence.  Those that have a little are hunkered down and are sitting on their pocketbooks, and no amount of encouragement from the new administration will make them change that outlook in the foreseeable future.

The banks of course are right along with everyone else, with the exception of the huge infusions of cash that the Fed has seen fit to give them.  They are plagued by foreclosures, people walking away from credit card debt, and a growing malaise on the part of the American public that dictates they not spend a dime.  Without spending, the economy hurts.  I have seen this as a real curse of the market all along since the troubles begin. Banks long labored under the misconception that things were rosy – people were spending money and would always pay their mortgage payment on time.  Time for a reality check, I think.  If lending institutions don’t do more for those whose homes could be saved, the situation will only get worse.

What really hurts everyone is the amount of people losing jobs.  The news tonight said that we can see unemployment reach 10%, and I think that this is pretty much a given. This situation drives working Americans to go into default, and there is no room for recovery from that scenario.

There are many who believe that people who are in over their head with the home mortgage should take their lumps and get on with it.  These folks believe the market will correct itself, regardless of cost to homeowners.  This is true in the sense that many people are in homes that they have no business being in because of both unethical lending practices and good old fashioned greed on the part of both lending institution and homeowner.

I also believe that the same should hold true for lending institutions that have made poor moves and now wish the American taxpayers to bail them out.  A good example of this is the move by Merrill Lynch paying bonuses to employees just before the takeover by Bank of America.  This was surely uncalled for, and yet John Thain, who lost his job over this move, justifies it by saying that you must pay these bonuses to keep the good people.  It does not sit well with a lot of people because these bonuses, normally paid at the end of January or first of February, were paid in December just before the takeover.  And it sits even less favorably that Thain spent millions redecorating his office suite.  Yet the money went to BOA from the TARP fund regardless of these factors.  Who, pray tell, is minding the store?

It is not that the government hasn’t made a try at fixing things.  Hope For Homeowners, the next greatest thing since sliced bread, had a total of 412 applications and provided a grand total of 17 loans.  The program was a bust because of high requirements for getting assistance.  It is not as if loans cannot be modified successfully – witness the FDIC’s handling of defaulting IndyMac Bank loans and Fannie Mae’s modification of loans.  This shows that 60% of borrowers can be helped if given the right set of circumstances.  The Fed is worried about protecting the taxpayer, yet stands by while these very people are going down the drain because of stringent requirements.  It makes little sense.

So, to answer my own question, I have to say, yes, let the market correct itself.  I feel badly for all those that need help, yet cannot easily get it, if at all.  But until we see a real shakeup and restructuring process take place, we pretty much have to let the chips fall where they may.  When the playing field is leveled, perhaps someone wise enough will come along and have an idea that works.

Leave a Reply