There’s a lot of talk about bailing out homeowners that are under water, upside-down, or otherwise looking at being totally screwed by their adjustable-rate or negative-amortization financial death traps. Some people talk about moral hazard, the risk that such action by the federal government will subsidize and therefore encourage bad behavior. This is on top of the usual arguments about it being a bad way to spend taxpayer money, about it not being the proper role of the government as imagined by the founding fathers, and so forth.
Keeping in mind that you can generally deter a behavior (like smoking) by taxing it, much as you can encourage a behavior by subsidizing it (like growing corn), let’s take a look at this from another angle. I submit to you, gentle reader, a proposed solution to the current explosion of foreclosures that doesn’t encourage bad behavior, and doesn’t cost billions in taxpayer funds.
Reduce the occurence of foreclosures by removing the tax incentive to do so. If you get a mortgage for $200,000 and default on it, the bank auctions it off for almost always less that it was worth when purchased. They write off the difference as a loss and reduce their net profit (and thus their tax burden) to suit. So don’t allow them to write off losses resulting from residential foreclosures.
One change in the tax code and the banks would have to change the formulae by which they decide whether to kick you out of your house or renegotiate your loan or let you slide for a little while longer. If your bank can’t handle the risk, maybe they can sell off your note to a financial institution that can (and write off that loss).
I like the idea of a dog-eat-dog market. The bold and the strong succeed. The foolish and the weak perish. Let the market sort it out, but take the tax-man’s thumb off the scale.
so now we let the market sort it out? according to what I read most of the people being foreclosed on couldn’t hold a mortgage at any rate. and yes there is moral hazard, there is nothing people can do about it now but it may be a huge influence during the next election. bailing out mortgages is no different than helping idiots rebuild in flood zones, in hurricane zones, saving houses built in the forest fire zonex and other losing propositions. if anything people who live in a safe(r) areas and pay their bills should get a break.
sorry forgot to subscribe
Ah, but helping banks that institutionally handed out thousands of bad mortgages is at least as damning as helping out the people that didn’t have the sense to realize they were swimming with sharks. By letting the market sort it out I mean allow the banks that invested poorly collapse. They have assets that other banks will buy (at the right price) and almost everybody’s private deposits are covered by FDIC.
Anyhow, this is mostly a reaction to misplaced resentment. Do you really blame the fool down the street that thought he could swing a neg-am loan? Entirely? Shouldn’t the lender bear some of the responsibility? Or rather, shouldn’t the lender — often a bank with an army of highly-educated financial wizards — know better? Certainly if the schmuck that couldn’t make his payment should have been able to figure it out, the thief in the three-piece suit could have.
I’m not recommending we directly help anybody, just that we take some steps to shift the downside towards the people who really have it coming, not you the responsible homeowner that makes his payments and didn’t bite off more than he could chew. I assume that the legislature is going to fling hundreds of billions of dollars at this situation, and it may even help, but the wrong people are being vilified here.
let the banks fail-no argument from me. also bill maher had a good bit about shooting a few bankers during a superbowl half-time, I am for it.I also realize that foreclosed homeowners will end up on government assistance anyway, but I see no reason to help them stay in the house. i wouldn’t be playing up their supposed incompetence. many people saw this as a chance to live in a million dollar home for cheap for 3-5 years. they knew this was coming. i don’t see it as a swindle, more like mutual agreement beneficial for the bank and the homeowner (at the time).
That’s what a swindle normally looks like. To the mark.
except that marks were in on the scam and now are trying to pull another one, and so are the bankers.
yet again somewhat happy I don’t own a home. I don’t have that whole “Security” thing but I also don’t have that whole “may lose my house” thing. Although I’ve gotten too much furniture again. it’s time to sell off my stuff again. Except for the drumsets. and the comics. gotta have priorities.
I firmly believe that government intervention for social engineering is not only wrong, but immoral. Has there ever been a case where the federal government used taxes, or tax breaks to modify social behavior that was successful? I am not sure how you define successful, but it seems that the un-intended consequences always over shadow the original intent.
-pf
@msilver – ask Dan all about how renting protects against the fear of losing the roof over your head. I think he’s lost two homes to foreclosure in the past year without ever buying either of them.
@pf – So you’re against the tax break on mortgage interest. Check. I totally agree that helped folks justify the messes they got themselves into. Many times when I was renting I’d point out that a mortgage was hundreds of dollars a month more than rent on a similar property, which would prompt an almost Pavlovian glazed-eyed response of “but the tax breaks…” from recent home-buyers.
That said, I’ll happily be taking my per-child tax credit, my mortgage interest deduction, and deductions for charitable contributions. And with the market down like it is, I’ll continue to take advantage of the loophole detailed in section 401(k) of the tax code that lets me invest for my retirement with pre-tax money. All of these are tax breaks that encourage certain types of behavior.
it’s when you start having kids to get your tax credit we start having a problem.
That’s totally why I have a kid.
Seriously, though. The presence of the tax break factored into the discussion of whether we were in a financial position to have my wife stay home for a while and all that. Just like the mortgage interest tax break factored into deciding whether we could afford to buy a house.
re renting vs buying…
if I lose my apartment… uh I signed a rental agreement that basically says “hey we could probably kick you out of here whenever the f we want” but it also says “hey I can move the hell out of here whenever I want” as well.
if I lose the house I own… “hey you know how you’ve paid in $100k+ to this investment you expected to own for years and years? Yeah well you don’t get that back. You just get to live in your car. without much warning. ha ha!”
Re- Renting vs. buying.
I love the logic in the above statement. Even without any tax advantages I would, given the opportunity, rather buy than rent. The main reason is that, while buying is more risky than renting, there is at least a chance of coming out ahead. You can’t win if you don’t play. All in all I would rather be a landlord than a tenant.
-pf
14th comment woo!
I’m sure if I found a house to buy and was in the right position to do so, financially speaking, I would probably buy a house. I just don’t see buying a home for the sake of buying a home to be an option I would pursue. Also, the housing price comparison in a quick google search shows that average home price in Santa Rosa CA is $725k and in Colorado it’s $271k. I know that’s just some web-based average (from 2006 also)… but I sure as hell don’t want to pay $725k for a home… if I paid for that based on my current rent, i’d pay it off in 60 years. Yeah sure I’d own it when I’m done… but.. I’d also be 93.