Jun 27 2009
An apology and TARP
First, an apology to my “loyal readers”, it’s been 3 weeks and 3 days since my last post. Five of those days was a camping trip, but the rest, well, I’ve been sick, and spectacularly un-motivated, sorry. Personal life is in upheaval, I will soon be living in a different place. I will try to be more consistent with my posting, I promise.
Now, on to business. This isn’t so much a current news story as an ongoing thing that I started thinking about today. Follow me through this, it’s kind of convoluted-
Let’s go back to about 2000, when a mortgage officer of exceptional intelligence and questionable ethics came up with the idea that he/she could give a customer a home loan of extremely low, even lower than the federally-set Prime Interest Rate, interest rate, by making it an adjustable rate mortgage (ARM) with a big balloon payment in five years. He realizes he can get the customer to agree by pointing out to him that home values have been steadily increasing, and thus the customer can take the loan that would normally be a bad idea, then just re-finance to a better, fixed-rate mortgage right before his balloon payment is due. The idea catches on, and pretty soon millions of people have bought homes using this plan. Shortly after this, let’s say 2002, a banker of exceptional intelligence and questionable ethics realizes that if his bank buys up a whole bunch of these “sub-prime” loans, they’ll make a huge profit when all of the people owing these loans re-finance their mortgages and pay off their original loans. This idea also spreads, and all of the big banks buy up HUGE blocks of these loans, more than they can actually cover, which they are allowed to do because of the very convoluted regulations regarding “commercial debt”- since they’re buying up blocks of loans from multiple mortgage companies, the mortgages are no longer “personal debt”, which allows the banks to take on more debt than they could if it were still considered personal debt. Unfortunately for them, Credit Unions don’t get to play as much, they have tighter regualtions after the big Credit Union Crash back in the late 80s (foreshadow foreshadow foreshadow)
Of course, we all know what happens next- the housing “bubble” pops, home values drop, and suddenly most of the people can’t re-finance, because they don’t have enough equity. Then the balloon payments, which they can’t afford because they could barely pay the original payment, come due and their ARMs adjust up. So many people are defaulting on their mortgages that it creates “jingle mail”- people just move out and send the house keys to the bank with a letter saying they can’t pay so go ahead and foreclose. The big banks suddenly have so much bad debt that they’re going bankrupt. WaMu, AIG, Chase,- crash, crash, crash. The government steps in to prevent the complete collapse of our economy, creating TARP- the Troubled Asset Relief Program. What TARP does is this- the government is buying up all of those defaulting mortgages, paying off the debt to the bank, thus preventing the bank from going bankrupt.
Here’s where I am completely confused- since the Government just paid off the mortgages, WHY ARE THE PEOPLE STILL LOSING THEIR HOUSES?!?!!?!? Even if they still owe the debt (which isn’t clear in anything I can find about TARP), they owe it to the Government, specifically the Treasury Department, not the bank, right? The Government spent 700 BILLION dollars buying out those mortgages, but still the banks are taking over the houses!
Something is not right in this equation.
Oh, just in case you’re wondering, the reason I said the mortgage officer and banker who came up with these plans have “questionable ethics” is that both plans are based on the idea of taking advantage of someone for a quick profit. Had people not been taking out loans that they had no intention of seeing through to the end, and/or had banks not been buying up big blocks of those loans in the guise of commercial debt, thus allowing them to get around the tighter restrictions on personal debt, none of this would have happened. I have nothing against Capitalism, but business should always be conducted ethically, and I don’t see that here.
It was the banks that got bailed out not the holders of the loans. Arguablly it would have been better to pay the loans and let the banks fail of their own weight. But our man in the White House is more interested in bankers wellbeing than taxpayers. Or so it would apear.
no matter how you slice it, the banks got paid, so they aren’t owed any more money. If I paid off your mortgage, you’d owe me the money, not the bank, right? So, if TARP is paying off the “troubled assets”, how can the banks still be foreclosing? they get paid AND get the house? No, I’ll say it again, something is very wrong with this equation.