30 July 2008

Bailout!

In a time where it seems as if a new bailout is bandied about on the 24-hour news channels (all dozen of them) daily, one has to wonder just where these things are leading.

Today, President Bush is set to sign a massive homeowner bailout bill. According to Fox News, the bill “could insure $300 billion in [potential default] mortgages” thus saving the owners from foreclosure. The bill also gives the Treasury Department “unlimited power, until the end of 2009, to lend money to Fannie Mae and Freddie Mac or buy their stock should they need it.” The potential cost of this bill, I believe, cannot be accurately calculated. The federal government is now in the business of guaranteeing mortgages for people who arguably should not have bought homes they did or got caught in wildly overpriced homes by a down market. Irresponsibility rules.

Fannie Mae and Freddie Mac, entities which are at best somewhat confusing to the average taxpayer, have what amounts to an unlimited line of credit. They’re too big to fail, say some. Sure, there will be more federal oversight of these semi-private, semi government entities (for a good working description of Fannie and Freddie, here’s an AT article for you). Never mind that many of the loans they were backing were suspect at best.

A Fox Business article sheds some light on where things went off the rails:

“Three years ago, just about anyone could have purchased a $360,000 home simply by signing some papers and agreeing to a monthly mortgage that, given the payment options available at the time, would have come to about $1,200.

(snip)

A study conducted in early 2005 by the National Association of Realtors showed that over two-thirds of all first time home buyers at the time had put down less than 10% to purchase their homes, and a whopping 42% of those first-time buyers had put down nothing.”

Having purchased a home or two myself, getting $360k for a signature appears outrageously simplistic to me. No documentation? No investigation of income or debt? No metric even guessing at the potential of the borrower to repay the loan? Those who made and took those loans deserve what they would have got sans bailout. Instead, taxpayers will foot the bill, potentially $300+ billion.

So I have to wonder, just what do I have to do to get a federal bailout? Behave irrationally and irresponsibly seems to be the answer.

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