Tuesday, August 28, 2007


That's why it's called risk

Sometimes it is good when Rush Limbaugh has a guest host. The guy he has on today, Mark Belling of Milwaukee, has been explaining the mess with the subprime loans better than any I've heard. He's been trying to pound it through the listeners' heads with rhetorical questions, "that's why it's called risk."

  • How far do we go with government bail outs when people make the wrong decision?

  • What about all those people for whom it was the right decision? Many people bought their dream homes and were able to ease into homes they might not have purchased otherwise.

  • What about the banks and Wall Street companies who bought up those loans and now want a Fannie Mae or Freddie Mac bailout of a bad investment?

  • Are the people who borrowed the money (at a risk) really worse off than they would have been paying rent for three years (at a higher monthly cost than the loan) and getting nothing back?

  • When real estate goes up, it's a huge windfall for some. What about them? They took a risk and won.

  • What are the unintended consequences of the government bailing out poor credit risks?

  • What if the decline is a good thing--a correction in the market?

  • What if the house was over valued when they bought it? Is that my responsibility?

  • This might be a terrific time for people who are savvy investors to buy a house. Prices had gone out of reach for many, and are now more reasonable again.

  • Many of the people who took out 2/28 loans were also offered fixed loans for 30 years at a slightly higher monthly cost. If they had done the prudent thing, paying a little more now for more security later, they wouldn't be in this mess.

  • Because new rules are being put in place, we're making it impossible for people caught in the first mess, to get out of it.

  • This is a small percentage of a small percentage. We won't know for 5 years if this correction is really a tremendous opportunity for the market to correct itself. Do we want to meddle with the market before we know?

One problem I can see coming is that those who bought a home at a fixed rate with money down in a neighborhood where others bought with ARMs and no equity are going to see property values fall as banks foreclose, neighbors file for bankruptcy or owners abandon their property. Next, rents are going to start going up for everyone, because there will be former home owners out looking for a place to live.

Either way, if you haven't been putting money aside for the inevitable rainy day, your wallet is in for a surprise.

No comments: