When people purchased these homes, they had an attorney present when they went to settlement.  If they had any lack of clarity on what they were signing, there was an opportunity for them to seek counsel.  In addition, the lender must have provided a truth in lending disclosure that at least estimates future payments.  If the borrower did not understand the agreement they were entering into, then a rational person would not have signed it.  It is not as if owning a home is the only option.

On the lender side, they dug their own hole.  The appraisers, underwriters and friends were playing this game with their eyes wide open.  The case might be made for investors that these complex financial deals did not have the level of disclosure required for them to ascertain the risk they were involving themselves in.  But I think even there, the people that played in securitization knew what they were involved in too.  Because ultimately high returns on debt do not come without higher risk.  

And then you have the real estate speculators who were using all this easy money to flip their way to fortunes.  I don't really have much to say about them.  But they had to have known what they were getting into.  And if they didn't, they should not have been in the real estate investing business to begin with.  And they get to learn a lesson in market economics that should be invaluable to their future endeavors.

Given the situation, I don't think we should do anything.  Let lenders and investors figure this out for themselves and take the losses for their folly.  Let borrowers who went well outside their means cut their losses and move on.  Let real estate investors file for bankruptcy when they are sitting on several properties they can't sell.  Let the market work this out is my opinion.  We already have the Federal Reserve devaluing the currency and pumping more money into the system.  I think that is enough damage.

I would support a total banking overhaul.  But I don't support bailouts for anyone.  We have been decreasing the amount of regulation of financial institutions for years.  And if our choice is to roll back regulation, then we cannot bail out the market.  That only encourages risk taking because then there is no consequence.  We should have learned this lesson back in the S&L crisis, but we didn't.  So maybe this time we will, either overhaul financial institution regulation or let the market work its will.

All that being said, I don't really know what your proposed solution would be.   So, what would you like to see?  And certainly, I breezed through the parties involved.  So, I may be missing something all together on the parties involved.

I have a couple thoughts in response.

First, there is a population who refinanced their homes or purchased omes with ARMs who were bamboozled into those loans by brokers who weren't looking out for their customers, but for their commission. (Hence congressional action to try to prohibit brokers talking people into higher rates than they otherwise qualify for.) This is the population we should be targeting and helping out.

Second, I strongly support creative alternatives to bankruptcy. I think that properly incented, lenders and borrowers can work things out. I'm just not sure that the President's deal is the right incentive.

Finally, I completely agree that the lenders should steep in the stew they created, but the impact of millions of Americans losing their homes woudl be disasterous. So I'd love to see an answer to the problem which would allow lenders to face the music without leading to millions of families being forced to move. (Own-To-Rent?)

I am just getting acquainted with this issue. We bought our current house three years ago this month, and I had the opportunity to get one of those great ARM rates.  I declined because I did not want to be surprised.

Americablog is one of the most liberal blogs around.  Here is what its main editor, Jon Aravosis said:

http://www.americablog.com/200...

I can deal with someone who was cheated by their mortgage broker, banker, or whomever. Someone who was literally lied to about how much their mortgage was going to cost them now, in two years, in five years, in ten years. But what I can't deal with are all of these heart-tugging news broadcast and Joe and Suzie who simply wanted the American dream for their children, so they risked their entire family's livelihood on a gamble that they could sell a house they couldn't afford before the "real" mortgage rate kicked in. Sorry, Charlie, but those people knew what they were doing. They gambled. They lost. I had the same choice they did, and I said "no," things were simply too expensive. So now they get a bail out and I get nothing because they wanted money for nothing?

There is a real downside to offering bailouts where no seller/broker deception occurred, and rather one is dealing with greed on the part of the buyer, mixed with wishful thinking.  One harms the public in the end if one gives a bailout for irrational decisionmaking.  And a gambling decision is one of those irrational decisions.  The harm is that buyers in the future will come to expect a government bailout, and will engage in another round of irrational behavior.  In fact, one might get even more irrationality the second time around.

As I said, I don't know enough about the overall issue, and I thank you for writing this diary.  It is a subject that deserves a lot of careful debate.  But remember that there were millions of buyers who took a saner course and bought what they could afford at the time, and consciously paid a higher interest rate.  With a bailout, we will all pay something to compensate the gambling buyers.  (Again, deceived buyers are another issue.)

I totally agree that there shouldn't be rewards for people who gambled and lost. We also purchased a house, and sadly at the height of the market. We're in a 7/1 ARM, so we have many years until it readjusts, and I do not expect a government to bail me out.

However, there is a larger issue if the mortgage crisis seriously harms the wider economy.

My biggest issue is the fact that no borrowers were included in these "negotiations." The government is substituting their (clearly questionable) "wisdom" for that of the voters - again.

It's a difficult circumstance.

I agee with your desire to help people who were fooled into higher interest rate refinances.  Without resorting to present value calculations, it is difficult in a phone conversation with a lender to really figure out whether you are getting a better deal.  But it is difficult to identify the population that was truly harmed.  With refis, how do you weed out the people who were going into the refi in a good position and only were doing this to cash out equity to buy a new car or pay for a vacation home?  How do we identify just that population?

On the own-to-rent idea, I'd say that lenders and fixed income investors are not in the business of owning fixed assets.  This would be forcing them into the property management and landlord business.  And you would get into the same issues as with the loan.  That is, the debt servicer would be replaced with a property manager, and the owner would be some distant faceless entity.  You would just be swapping intermediaries.  And forcing them to rent would really dry up the mortgage market.  It would be hard for Fannie and Freddie to create liquidity in the mortgage market as investors would balk at buying bonds that might convert to asset ownership (especially, an asset that they could not divest).  After all if they wanted to own real estate, they would invest in REITs.  And denying lenders the flexibility to cut their losses would mean the bar for getting a mortgage would be raised really high.

I think what government can do to help out is connect borrower and lender.  Since the market is so complex now, government can act to facilitate communication between the parties as the Treasury has done (though borrowers should be included too).  This way government doesn't bail anyone out or step in an alter contracts.  Lenders have the greatest incentive without government stepping into to resolve this themselves.  And that is that it is very costly for them to take properties into foreclosure.  They don't really need any additional incentive than just that.  But you need to bridge that gap between lender and debt servicer so that debt servicers don't act like their hands are tied and drive people unnecessarily into foreclosure.

And I think the courts are another great way to help solve this.  In the cases where borrower and lender cannot reach an amicable settlement, then courts can serve as an independent party to mediate that dispute.  So, government to facilitate communication, and courts to resolve cases where the parties cannot agree.

This is another one of those questions, just like the problem of illegal immigration, for which there is no answer that can satisfy everyone.

In immigration we have the moral problem of what to do with illegals who have been here or years, have kids born here and attend school and may go to college.  Hard workers who have achieved a modicum of success, certainly better, light years better, than they would have achieved had they stayed in Mexico, or thereabouts.  Do we just kick em' out?  That is the question that seperates America.

So it is with this current issue.  No matter what Bush's political agenda is, hundreds of thousands of us, maybe more, will breath easier knowing that we (not me) can keep our homes and not go into foreclosure.  But the fairness?  Like everything in life, there ain't any.  Can panels in every city accurately determine who are the people who are using their home as their only residence, and are now in trouble because they didn't realize the consequences of their action when they took out their spurious mortgage?  Like said above, where was your closing attorney?  These people gambled in a way which I, personally, did not, preferring a 30 year job.  Lots of people got away with the lower rates on ARMS for years while their houses went way up in value, and they pocketed the difference between what I paid and what they paid.  If their gamble had gone bad or if this were a gamble by them on a second or third home, would I be happy to see them bailed out while I stood conservatively and they laughed, then got bailed out?

I can understand the anger by those in my shoes, or in those who waited and did NOT buy because they waited to save money till rates lowered, and they didn't want to shoot craps with the greatest investment we make in our lifetime.

But the Republicans DO bailouts.  Look at the Great Decider, who was bailed at at all junctures of his life.  Look at another great Republican, St. Ronald, who decided to deregulate the S $ Ls, which we paid for later by the billions.  (By the bye, does anyone still remember the Keating 5;  if not, I suggest a look at Google, where you'll find, among others, straight talk expresses' Honest John McCain, John McCain whose sec'y aide warned him not to go to Keating's office to talk about handouts, er, campaign contributions.) And of course the guys behind the scandals got off very litely, bailed out, one might say, including the Decider's brother Neil who, in exchange for interest free loans that DID NOT even have to be paid back by Brother Neil loaned out millions of his employer's Savings and Loan bucks to a very shady developer.  Those dollars were totally lost, millios of them, in exchange for, if memory serves, about $100,000 in a "loan" to Neil.

So we may get pissed off, those of us who are safety minded, while others who are gamblers (with no chance of losing, as it turns out) will be happy.  And Capital One, Morgan Stanley, Countrywide Financial, Novastar, they'll come out of it OK, I'd guess, judging from past times.

But as Rush, Sean, and the Great Decider say, we need less regulation, less government intrusion.  Now we know why.

And soon these corrupt lending practices will be forgotten, like the S @ L swindles, and lost to the collective memory, if it ever even existed there.

This time around the likes of Citibank, Countrywide, Washington Mutual and friends will not be getting off the hook.  They are already feeling the pain.  In corporate finance, it is HUGE to have to draw on your emergency credit lines.  I emphasize HUGE!  And Countrywide had to do just that.  It's time to kiss the corner office goodbye if you have to tell investors that you needed to tap that line of credit because it means your operating funds, the lifeblood of your business, are dried up.  And Citibank has announced huge losses from write-downs, and they fired their CEO.  Heads are already rolling.

We need to make sure that Democrats don't do something crazy like raising the caps on Freddie and Fannie.  If they do, then we will be in a wholesale bailout.  And then you'll be right about Citibank and company getting off the hook yet again.  After Enron and Worldcom, we so should have revoked Citibank's license!  Democrats should just sit back and do nothing and let Republicans shoot themselves in the foot on this.  I am okay if they hold some hearings, grill some officials, but no legislation (unless they want to overhaul banking regs).  

There is some legislation I would like to see though.

I would like to see legislation prohibiting "brokers" who get paid extra for talking people into more costly loans.

As for a solution to the problems of people foreclosed upon and lenders on short credit, someone's ox is going to get gored, and it's not going to be pretty.

I just want to make sure the people get gored a lot less than the powerful. (to channel Al Gore for a moment)

Re those losses, I'll bet dollars to donuts (to coin a phrase) that while the CEO of Citigroup is gone and assuredly not sleeping on a subway grating in Wash., D.C., it is the thousands of lower level employees who will feel the pain.  And most of the muckedy mucks, the kings of criminality, will remain colecting their good paychecks, perks and golden parachutes.  As Jim Cramer sted on Mad Money (or Squack Box), those stocks, Morgan Stanley, J.P. Morgan, City, FNMA, Wachovia, Capital One, Merrill, etc., will bounce back and by next year or so will be hot as ever.  May or may not be EXACTLY true, but my guess it will be, overall.  Proving, as usual, that plus ca change....