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Sunday, February 21, 2010

U.S. Robin Hood Real Estate

This week, President Obama announced revisions to the mortgage bailout program, giving the hardest hit states additional support. But when clients can’t pay – or simply don’t want to pay – will modifications help? For many of these borrowers, it was all-or-nothing from the beginning.

Back in June of 2007, customers would walk into my office saying, "I'm going to buy this house, redo the roof, sell it, and make a hundred grand!!” (During a bubble, people never say “thousand.” they always say "grand.") “But,” they would add, “we have to do it right away, because this market won't last forever!" Other clients would admit, "I don't have the money to buy supplies for renos, so I'm going to buy them on my credit card. It’s no problem. I’m going to flip the place in a month anyway."

In other words, people were intentionally making financially dangerous decisions, knowing full well that they were buying into a bubble. I saw little of the innocent “I didn’t understand the paperwork” crowd that made appearances on TV later on. And when I declined their mortgages, they got angry: "If you won't give me the money, I'll just go to someone else who will!" (I was, after all, denying them their once-in-a-lifetime opportunity to get rich.) If you're 40 years old and your only assets are a Harley-Davidson and some tools, why not risk everything? After walking out of my office, they probably went to a high-risk lender, got approved, and then our bank stupidly bought back their mortgage through a CDO.

Now we are giving them more money. I would like to see the U.S. housing market recover more quickly, just like everyone else. But instead of setting a dangerous precedent, the Government should continue to increase productivity through infrastructure renewal, keep interest rates low, and wait until the market drops low enough for the savers (of which there are many) to buy the homes. That is, stop bailing out gamblers and let the market work itself out.