Baby Boomer Natalie Brandon was made famous in late November by the Wall Street Journal which told of her absurd plunge into debt using her home as an Automatic Teller Machine. She fell hook, line, and sinker for the free lunch nonsense that surrounded the real estate bubble and now she is trapped by a debt load that is about to crush her.
The 51 year old Californian bought a house for $105,000.00 in 1985. Had she stuck with the original mortgage she would now have a balance of about $40,000.00 and monthly payments of around $600.00. She'd own the house free and clear before she turned 60. Isn't that the American Dream? Home ownership?
No, not for her generation. The Boomers were taught a different lesson than their parents. They may not have had a cent in a savings account but by using the accumulated equity in their houses they could buy almost anything they wanted almost any time they chose. Debt, they were told, was wealth.
Not any more. Prices on houses are falling and millions of Americans are wistfully watching the good life slip away.
Ms. Brandon refinanced her house five times over the last seven years. Now, after 22 years of "home ownership" she finds herself with $625,000.00 in mortgage debt on a house barely worth half that amount. She tried to get a new 40 year mortgage but the deal fell through. Her payments would have been about $4,000.00 a month until she was in her 90s! This is not a typical example of stupidity, but it reflects the general thinking of millions of Americans. It's okay to borrow to buy things you don't really need. Now the scene is limping to an unhappy ending. Reality is knocking on the nation's door.
Answering the door is Mr. Henry Paulson, Secretary of the U.S. Treasury, who wants to rescue people who are in over their heads with mortgages they can no longer handle, or about to find themselves in trouble because their "teaser rate" mortgages are resetting and will be too expensive for them to pay. Paulson fails to realize this is none of his business! The U.S. Constitution reveals there is absolutely no role for the Treasury Department to play in bailing out citizens who get into financial deals beyond their means and need other people to bail them out. Nor does the president or Congress have a Constitutional role to play in such cases.
Although there's no permission for the federal government to get into the business of "repairing" mortgages, Henry Paulson is pushing forward on the project anyway. And he has already picked out a category of borrower for special help. People who were able to scrape along with the sub-prime "teaser" interest rates, but can't make the higher payments after the interest rate is re-set, are chosen as beneficiaries of a teaser freeze. He wants to keep the low rates where they are for up to five years. He says taxpayer money is not be involved, although he's pushing Congress to jump on his bailout express.
What about the people who got cash-out refinancing when subprime loans were all the rage? They extracted cash from their houses even though they put little or nothing down. Should the taxpayer rescue them? And what about the people who lied about their financial status and got loans that far exceeded their ability to pay them back? Bailout for them? The Paulson Plan will bail out many people who don't deserve it while skipping over millions who struggled to play by the rules but are being squeezed by the bursting of the real estate bubble.
There's also the would-be homeowner who was patient and prudent knowing that one day the imprudent real estate gamblers would have to relinquish their property. He expected to be rewarded as prices fell and more affordable houses came on the market. Paulson wants to intervene to prevent that from happening, rewarding those who gambled and lost while penalizing those who patiently waited for the eventual market correction.
The market will correct no matter what the government does. But the intervention will complicate things and postpone, for just a little while, the day of reckoning. In the meantime, the Natalie Brandons will be encouraged to rely more and more on Uncle Sam to rescue them from their stupid mistakes. Unfortunately, Sam is broke and will have to shake down taxpayers to raise the money.
December 4, 2007
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