Where have all the bad boys gone?

Yet another HOLOCAUST post. No, not the one involving Germany. Rather it is the "HOme LOan CAusing US Torture" post.

Take a look at the picture below (this is my summary of the problem when the system is a single household, a bank, an investment bank or Main street in general).

An explanation or rationalization I heard recently that actually makes sense.

What is different between a guy who is borrowing a large sum of money with or without any chance of paying the money back?

One thinks he is a less risky borrower because he forsees his job being stable and his ability to make money over the years to pay off the debt. The other is considered irresponsible because his current income level does not support the mortgage he is getting into! Right?

What if we treat both the borrowers are equally irresponsible for borrowing large sums of money in the first place? Forget the fact that one has 20% equity and the other has 0%. At the end of the day if they both loose their jobs and foreclose the homes, both of them end up losing everything, the house, down payment etc., except the dude with 0% does not lose any of his own money!

I know this sounds socialist! and sometimes goes back to a discussion between my dad and me when he visited the US (the only time he visited the USA!).

Dad : So what do you own in this house?
Me : 20% of the house!
Dad : How does that work exactly?
Me : In India you waited till you were 55 to build a house after you had saved up all the money. Here I borrow the money in advance and pay it when I get to be the same age. Why should I rent when I can own this and pay mortgage and get a tax break on the interest?
Dad : All that is fine. But you are assuming that over 30 years things will stay the same...
Me : Look at it this way. Some dude bought this house for tens of thousands of dollars and sold it to me for hundreds of thousands of dollars, thirty years later and is now sitting in Florida! Worse case in 30 years this house will be worth millions of dollars when we are about to retire.
Dad : Edho sollare. Unakku purinjaa sari! (you are telling me all this stuff. I hope at least you understand what you are saying!)

He was not far from the mark. Really do not know if borrowing is a bad idea in the first place. Especially if you view that the problem with the system gets traced back to the home owner in the block diagram I put together. Every home owner has hedged his bets, along with the blokes who counted on using this to dish out free cash to people and calling it investments.

The banks were really not betting on the guys who borrowed money with "0" down and no collateral. They were betting on the infinite rise of real estate prices!

There was also another water cooler discussion that was enlightening. Sometimes transcripts of these discussions among techies can be used directly as chapters in Dilbert books!

Recently some economist from Princeton gave his opinion on Bill Maher's show and it is doing the rounds on the internet. Apparently that person or Maher said that America is not manufacturing anything and that could be the cause for this problem. It was pointed out to me that the one thing that America still has is plenty of "real estate" or land and the biggest thing that is "Made in the USA" and sold successfully is HOUSES! Americans buy these houses. Foreigners buy these houses. It helps keep money generated in the USA, stay within the States and this problem is because of a demand and supply issue in the housing market.

In short a person put it as "Instead of printing money, they made a lot of extra houses!"

On another note, this is not far from the agriculture loan freebie that the Tamilnadu government gave the farmers. People who were or were not farming went to collect this free cash because they knew that there was nothing to lose, when they defaulted! Same psychology!

In anycase, we will have to see what the bailout does, what it has in fine print, and how much Jr. and the little one will have to pay in future taxes to bailout a concept of living in the future..

Have always been wary of "living in the past", now equally wary of "living in the future". Somehow in the middle of all this, life at present is very very confusing.

Tomorrow is another day!

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Color TV's and Cheap loans

In India, we get color TV's if we vote for a certain party at election time..

Here we get cheaper loans from every party!

Right now the race is on to give people tax breaks, cheap loans, etc. to show which new candidate will make the next president!

Things are not very different, when it comes to election time!

The concept seems to be very simple. Appeal to as many people who can legally vote by giving that demographic something that would appease them!

India lives in villages, or so they say. A color Television is something that may not be in abundance in the village home. So, even if there is no electricity to watch the TV, the concept of promising every household a TV is a gimmick that is bound to get the vote bank to your party's side.

Well, consumer electronics is cheap here in the US. If the political parties have to go that route to promise voters, they might have to think 52" TV's and Plasma! Too expensive.

It is an easier alternative to give taxpayers a 600 dollar tax credit!

1. It is government money. So the expense can be passed on to future generations as a deficit and no one will know any better!
2. It covers a much wider demographic of the vote bank.
3. Cash is king. They can buy whatever they want!! This is as good as giving the Chinese government and Walmart, a tax break considering almost everything here is made in China and sold at Walmart.
4. It is way cheaper than giving everyone big screen TV's!

The other tactic, is to let people who borrow way over their means, keep the loans that they should not have been given in the first place.

Still remember, calling into the local public radio program, "Forum", a few years back. I asked the panel why the banks are giving these cheap loans (now referred to as sub-prime!) when they have no way of getting their money back.

I am no economist, but a chain of events was obvious to me...

1. Banks give variable interest loans to people who cannot afford to pay the mortgage when the interest rate increases in a few years.
2. Fueled by these loans, house prices increase because there is more demand, less supply
3. People buy "investment properties"
4. The inevitable happens. Interest rates increase.
5. Foreclosures increase
6. More houses come on the market
7. House prices drop!

Now, the banks gave a loan for a 400k house at 600k! When they sell the foreclosed home, they get back only 300K. How do the banks make money??

Worse,the hardworking folks who actually can afford the house, and submit documentation in triplicate showing they can pay the mortgage(aka us), get the shaft because our house price also drops because of this scam!

How stupid are these banks?

The panelists were saying "The banks are not doing anything wrong by giving people cheap loans, without checking to see if they can pay it back, because the homes are worth the money and if the person does not pay the loan, the bank gets the house and recoups the cost". Duh!

Wish I could play back that program! Think it was some Profesor from Berkely or UCSC who gave that brilliant answer!

If there is one real Lowest common denominator in this world, it is Politics and politicians.

Now add to that, greedy banks!

ps. We are back! All four of us are back to normal.

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