Sub-prime Bail Out

[Aliantha]

I was watching 'world news' (a bit like the world series because it's all about one country) on the weekend and they had a segment about the effects of forclosures in Cleveland. There are 1000 repo homes in 1 zip code. The area is basically becoming a slum now because the empty houses are now home to crack houses and squatters or they're simply being defaced and pulled apart little bit by little bit.

This of course has meant that the people who have paid their mortgages now live in an area where the value of houses has slumped which in turn means their major asset is on the verge of becoming a liability.

While I was watching, the first thought that came to my mind was; where are all those people living now? What kind of stress is this causing in other neighbourhoods?

I got to thinking about this situation and thought of a way the government could step in but benefit all parties concerned, including themselves.

Rather than subsidise the mortgages, they should simply buy the house from the bank, then 'rent to buy' the house to the foreclosee on a long term deal (say 25 years). This benefits the community by not having empty houses prone to vandalism thus maintaining property values in the area. It gives the people somewhere to live with minimal disruption to children etc (which was a big concern from my perspective). It means the government has an asset which is also 'making money' for them. It means long term, the foreclosee either ends up owning the house anyway, or alternatively, the government can sell the house in the future when the market is in a more stable position.

Everyone wins.

[tw]

Originally Posted by Aliantha

Rather than subsidise the mortgages, they should simply buy the house from the bank, then 'rent to buy' the house to the foreclosee on a long term deal (say 25 years).

That is what banks (et al) do. They resell these homes to companies specializing in refurbishing and refinancing homes to new qualified buyers. The problem is that American incomes in those price categories have been falling for the past seven years (relative to inflation). Interest rates are rising. Economic downturn is a real possibility.

All that means there are not enough companies to move these homes off the banks hands fast enough. Furthermore, many of these defaults are to large financial institutions who are not setup to handle so much defaulted real estate.

The system is swamped with too many homes, and liquidity shortages. A problem made worse because the market was inventing liquidity where it did not exist with money games.

Those homes lie on a fault line; an earthquake only in that part of the economy. It will take years to resolve. That neighborhood is the risk everyone takes when buying a home.

Meanwhile, this same problem has long been ongoing in some areas such as Detroit. Your report only cited a different area. But the same problem has long existed.

Americans are spending 10% more per year than they are earning. As Cheney said, "Reagan proved deficits don't matter." Welcome to the reality of what has not mattered for many years now. It could be ignored for many years by playing money games such as sub-prime mortgages. Sooner or later, the economy takes revenge - takes back what it is due. The problem existed many years previous. So we played money games to ignore it. Sooner or later, we have to stop playing money games and acknowledge the economic problem created by too much money migrating up to the top 1% - and too many lower incoming falling for the past seven years.