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Article by former congressional candidate Thomas F. McMasters
| Executive Summary |
| In this article I examine the 60 Minutes segment about the financial wisdom of walking away from a mortgage. I write it in the context of our country's moral values. In the end the bank's decision to use the charity the government gave them to enrich themselves instead of helping keep the country out of economic turmoil is an understandable reason for individuals to also think of their family economics before the good of the country. But can the country afford it and if not who is responsible to make it right? |
I watched 60 minutes Sunday night. The last expose' was about people walking away from their mortgages even though they have the means to pay. I strongly disagree with this course of action. This is a dangerous shift in moral values which will further hinder any economic recovery and one that posses a serious threat to our country's collective standard of living. Yet given our congress chose to implement a TARP solution which protected the wealth of the entrenched banking establishment instead of adapting a real solution which would have greatly mitigated what the banking blunders did to the economy I can't find any moral difference in the people who decide to try and protect their own wealth.
Without a doubt back when the TARP was conceived some form of government intervention had to be undertaken to keep the economy from collapsing into depression. If the Bush administration had adapted a solution consistent with the one I proposed property values would not have fallen to the extent they have fallen. In fact, the entire economy would have been much stronger these past 2 years. Instead the leaders in congress pushed through a plan that gave the bankers sweetheart deals on interest rates but did not require the bankers to pass along that savings to the public. Instead the bankers decided to raise their margins allowing them to make more per loan. This allowed them to lend to fewer people but still keep their income high. These bankers made a business decision not to lower the interest rates for people whose homes were losing value. The banks attitude was and is "our profit is more important than the financial health of the country".
Let me explain with an example; suppose someone bought a $200,000 house back in 2004. At that time they might have gotten a 30 year loan with a interest rate of 7.5%. Their principle and interest payments would be $1,398.43 a month (of course their total payment would be more because of county taxes). One result of TARP was the government worked to lower interest rates for the banks. If the banks were offering loans with the same mark-up they use to offer mortgages they would be loaning money at 3.75%. A $200,000, 30 year loan with a 3.75% interest rate cost $926.23 a month. Conclusion: banks could give their stable customers this interest rate and maintained the same profit margin they've traditionally seen.
Even though the banks aren't offering loans at the rates they should be, they are offering loans between 4.5 and 5.25% to new customers. For their stable customers whose houses have lost value they won't offer new loans at these rates. Instead they hide behind the fact housing prices have fallen in order to try to keep responsible customers in higher rate loans. They use convoluted logic to protect their high profit margins. They claim the stable customer that is able to make his $1398.43 payments on the $200,000 / 7.5% loan is a bad credit risk and not worthy of a new $200,000 / 4.5% loan where his payment would be $1,013.37. In order for the stable customer to prove his credit worthiness the bank will make him
come up with a 20 percent down payment and an equity payment to make up for the lower house value. For instance if they customers house in now worth $150,000 but his current loan has a balance of $198,000 in order for this customer to get a loan at the current interest rate he will have to give the bank $78,000; $48,000 to make up for the lower value of the house plus a $30,000 down payment.As an interesting comparison, lets look at how much value a home could lose and yet the home owner still be better off financially if they stay in the home at the new lower interest rate. Remember a $200,000 loan at 3.75% has a payment of $926.23 a month. A 30 year loan for $133,000 with a 7.5% interest rate would cost $929.96 a month. The obvious implication is if the TARP would have been created so that the lenders would pass along the charity the government is giving them a $200,000 home could have lost $67,000 worth of value and the home owner still would not have a financial incentive to walk away from their mortgage. Instead, those congressmen that voted for this version of the TARP voted to permanently change the morals of the people setting the new ethical standard with personal profit being the first and overriding priority. Because the congress decided it was alright for businesses to put their financial interest above the interest of the country the only logical expectation is that collectively people would end up changing their morals to adapt the same philosophy.
After seeing this episode of 60 minutes and realizing the detrimental influence our current congressional leaders propagated on our national integrity, I felt a renewed commitment to ensuring there is at least one candidate on the ballot committed to promoting the best interest of this Country. I'm not sure in what form that will take. I'll have to wait another two years before it could be me again. The other choice is to try and make this magazine influential enough so it guides our current congressman. Our congressman was influential enough at the time TARP passed he could have insisted on a well written law. That opportunity past but he still can use his considerable influence with the banking industry to convince them they ought to do what is right for the country and start offering loans at lower interest rates, without demanding huge equity payments to their solid customers. We will only make that happen though if you help me make this magazine a key voice of the Ohio constituency. That can happen if you pass along this article to your friends and make the contents part of your conversation. Also let me know you are reading. This will prompt me to write more. I've got a composition about taxes in my head. Ask me to write it.
One last point. In no way should the government work to lower the principle of a loan unless that principle reduction gets reinstated when the home is sold . Reducing principle balances will only further decrease the value of the surrounding homes. The better solution is the one I propose - reduce the interest rates so that the mortgage payment is the same as if the principle had been reduced. This will help stabilize housing prices.
To see my proposal on how they should have managed the banks under TARP see what I wrote in Feb 2009.
Here is a related article: Mortgages: Strategic Defaults Are On the Rise - Yahoo 11 May 2010
Background:
tfmsview, The Online Magazine; publishes commentary and opinion
by Thomas F. McMasters. Tom
McMasters achieved ballot position for
Huber Heights, Arcanum,
Bradford, Camden, Celina, Coldwater, Dayton, Eaton,
Fairfield, Fort, Laramie, Greenville, Middletown, New
Bremen, New Paris, Oxford, Piqua, St Henry, Tipp City, Troy,
Union City, Versailles, and West Milton.
It covers Darke, Preble,
Tom would like to thank all
the
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