You’re welcome

Dear Mortgage Holder,

Obama’s latest plan must sound pretty sweet to you. You bought a house and paid too much for it.

It didn’t look that way at first because after you bought the house, it went up in value. Prices were rising everywhere fast. Reasoning that nothing could go wrong, you took out a home equity loan on the increased value so you could get that flat screen TV and some other things you “needed.” You really ran up those credit cards.

But then the housing prices started falling to more realistic levels. Sure, they fell fast and some of that decline was caused by idiot bankers making risky loans to people…like you, maybe?

Now your mortgage payments are killing you and you’re complaining about it.

Obama has heard your cries. He has decided to dig into the treasury and give money to lenders so that you can refinance your house and lower your payment.

You remember that I have been renting. I’ve been saving my money, keeping my bills low, scrimping and acting responsibly. When you made your loan, remember how I laughed at you and said you were being foolish? “How can you expect to pay for all that extravagance?” I asked. Boy, was I smug and morally superior.

But you got the last laugh. Because I saved and did well, my taxes are going to go up, so that Obama can pay the bill for all this refinancing.

In effect, the money that I have been saving to buy my own house will be going to pay for yours.

I read in the papers that a lot of “journalists” and politicians think this is “fair.” They want to move quickly, too, because they think if we don’t then the economy will get worse. How do they know? They don’t. It’s just a guess. But everybody will be happy because the government is giving away money. They never stop to ask where the money comes from.

You’re probably so happy that you hadn’t even thought of the best part. See, your payments will go down and you get to keep your house. That part you knew. But your house will also increase in value in a couple of years. That means you’ll be able to sell it at a profit. So you’re getting a kind of double gift; you’re going to be doing pretty well after all.

All thanks to me and my money.

Just wanted to say you’re welcome.

Your Pal,

Briggs.

34 Comments

  1. Dear Mortgage Holder,

    Assuming housing prices didn’t “tumble,” how were you planning to make your mortgage and home equity loan payments? Were you planning to sell your house and rent or buy a smaller house? Use the proceeds from another home equity loan? Get a big raise?

    Your problem has nothing to do with a fall in housing prices — it has everything to do with under-planning and over-spending. I guess you learned that from watching Congress.

  2. My coworker grew up in communist Poland and is my canary in this economic coal mine. This gentleman is more spun up than anyone I know about the government taking over the private sector and bailing out others with his assets. Assets earned through his hard work, and at risk to his personal freedom and life.

    A fight is needed, but I don’t think the Republicans are the ones to fight the Obama totalitarians. I’m ordering Solidarity buttons to wear and give to my friends.

  3. Sorry that the straw man is taking such a beating! There are so many causes and contributing factors to the current crisis that misplaced ire is inevitable. Having worked in finance for all too many years, I know very few people who fit the archetype of the myopic homeowner going ever deeper in debt based on the theoretical increase in the value of his home. While not non-existent, I have yet to see any real, dependable numbers to overcome my own experience with hundreds of individual clients over the past decade.

    There are several more pertinent initiators of this crisis. First, and most critical, real estate values have long been constructed of hot air — a self-referencing system where increasing prices were based on increasing prices and rationalized into long-term real value. This led to the collapse of home prices when loans dried up.

    Second, the packaging of mortgages into bonds — it never made sense to me on either a theoretical or a practical basis, the real basis seems to have been the exploitation of accounting rules to expand banks’ ability to get loans off their own books. This resulted in the national bank of a certain country (of pommes frites fame) declaring it impossible to determine these bonds value and thus to be worthless — leading to the collapse of many banks’ financial capital.

    Third, the public was pursuaded to believe the economy was entering a vast depression, leading to retrenchment in all spending and thus contributing even more powerfully to the crisis. The fact that the US economy continued to grow quite well through most of 2008, right up until the fourth quarter, should show that this belief was driven by illusion, not economic reality.

    I have only rarely seen any article in any source of news or opinion showing the slightest awarenss of these mechanisms — not red or blue (or green or amber, for that matter), not left or right, up or down, strange or charm… And unfortunately, I know from experience as a military planner, if you don’t know where you are, how you got there, or what’s really going on, then any plans you may make have only a random chance of success (like a snowball finding an ice chest in Hades…).

    Be that all as it may, I hope you have enjoyed your apartment living all these years. I enjoyed my time in U-Hall 4 on West Campus, too, back in the day when H.T. Rhodes made sure Cornell had the highest tuition of any Ivy League school — ah, the joyful, irrational exuberence of pricing!

  4. Sorry — that was *Frank* H.T. Rhodes, when he became the new president of Cornell in 1977 (and he didn’t give us a mid-term break that fall, either, leading to our class’s occupation of Day Hall)…

  5. Roy: On straw men …

    Our host’s post speaks not at all about the cause of the current economic mayhem. Rather it cleverly spotlights the administration’s plan to tax the prudent, conservative and cautious in order to rescue the reckless, careless and irresponsible.

  6. Dear Briggs, Speed and us (that is, my wife and me);

    Serves us bloody well right for being such chumps. Haven’t we been paying attention the last 30 years or so? Haven’t we seen how things work – that being responsible & playing by “the rules” is for losers?

    We do “own” a house and have pulled out equity from time to time, but with the exception of some kids’ college funding, the money was always plowed back into the house (and we religiously avoided exceeding 80% LTV). Using equity for a shiny new car or boat would not have occurred to us in a million years (and besides, we’d rather have the nice, remodeled living room (sans 60″ flat screen) than a new SUV).

    And to think I was almost fool enough to try and cash in on “how things ought to work”: About 4 years ago I happened on a graph of housing prices since WWII, and the very large spike starting in the early ’90s jumped out at me. We’re heading for a crash, I thought. I told my wife we should immediately do all the projects we’d been thinking of, including a 2nd floor master suite addition, sell while the selling was good & rent for a while, and then buy it back out of hock after the crash. “Silly boy”, she said. “We’ve got one in college & one about to be; it’s too much to deal with right now, and besides, the government will never allow the housing market to really crash – there’s too many people invested in it all over the world.” “Naive female!”, I fumed; “The housing market is so overheated that it would be close to a trillion dollar bailout if things go sour – no government can afford that!”

    Well, we now know who was the more sensible. At least we’re not upside-down. Yet.

  7. How much are your taxes going up? I hadn’t heard about any hike in taxes, except rescinding the phase-down of Death Taxes, I mean inheritance taxes, which is to say equity at mortality taxes, which are primarily taxes socked to the heirs of homeowners who kick the bucket.

    Otherwise the new Stimulust Bail is going to chop your taxes, oh renter person, who was so smart as to avoid investing in real property but kept his wealth in fiat money instead. Clever move, that.

    Because it’s all fake money anyway, and the expansion of the fake money supply is sure to cause inflation, which will screw those who hold onto “cash” but help those of us with the foresight to acquire real wealth, i.e. real estate.

    My advice is to turn your fiat funds into real estate ASAP, while the prices are down. Then you can be one of the landed gentry class like me, a resident-owner steward of the land, and drive a lawn tractor on the weekends. And pity the fools who rent.

  8. Mike,

    Love to. But buying requires money. For now, I live in the wrong place. Anyway, the idea of riding around on a tractor manicuring my lawn each weekend makes me shiver.

    Roy,

    I agree with you on your facts but not entirely with your analysis. When an idiot banker offers you a risky loan you are not obligated to accept it. You are supposed to be responsible enough to say no.

    Now, I am all for letting failing corporations, like banks, fail without receiving my money. Federal taxes aren’t necessarily increasing now, but they will of course have to in order to pay for all the spending. Local taxes are already on their way up.

    David Brooks at the New York Times posted an editorial agreeing that personal responsibility—on the part of businesses and people—should be paramount, but then arguing that the economic system is like the

    swaying Tacoma Narrows Bridge you might have seen in a high school science class. It started swinging in small ways and then the oscillations built on one another until the whole thing was freakishly alive and the pavement looked like liquid.

    It then crashed. So, he claims, the government must step in the stabilize the bridge lest it collapse. Not to stretch the analogy too thin, but this is stupid. For, in the end, if you do stabilize it, you are still left with a crappy, dangerous bridge that should be replaced. Better to tear it down and rebuild a better one.

    The “experts” say this is not a good idea. These are the same experts who could not, or would not, see what was coming and are in part responsible for what it happening. See this interesting column by Kevin Hassett, director of economic-policy studies at the American Enterprise Institute. He makes the claim that there were too many “experts” too sure of themselves. Some were unscrupulous, too, of course.

    The way it is now, the government is giving money—besides the massive pork barrel spending—to companies and people that did not know what they were doing, or did know but shouldn’t have done what they did. Those of us, people and businesses, who acted responsibly, the ones left with the money, are going to have to pay. A more idiotic solution is hard to imagine.

    Yet smug schmuck Chuck Schumer, my senator, thinks “the people” don’t care.

  9. “Statisticians knewsome good jokes”.
    Here’s a better one:

    What’s pink and sits in the corner?

    A naughty strawberry.

    In defence of tractors:
    They are surprisingly sexy up close, especially the big ones. They make a great sound, they smell of light machine oil and two stroke. But why does buying a place mean you have to grow a lawn? You could always buy a cape so you wouldn’t shiver.
    You don’t have to have the tractor either, you could buy one of those natty robot things that slowly cuts the grass all day and stops at the edges by infra red or some fangled method so it doesn’t eat the roses! or the lettuces, something tells me you’d be apumpkin man

    Buy a sheep., or a goat,, they’re more fun;
    Better still, grow a forest,
    Buy a place by the sea where the grass won’t grow;
    Convert the land into meadow and let the rabbits do the necessary!
    Pay someone to manicure the lawn if you like that sort of thing;
    Pave it over and invite environmentalists to come and visit. Tell them it’s recycled concrete mixed with broken tyres and CD’s for added sparkle. Did you know you can buy crushed CD’s for mulch for the garden? Well you do now.
    Manicured lawns are for people who lack imagination, unless you have a mansion where lawns look just right. I loved walking past the front gardens in E11 that were about ten by ten foot to see how people ‘used’ the space’. There were some seriously flat lawns. With that much land, scissors would have done the trick, and probably still do, most afternoons when it isn’t raining.

  10. Those of us, people and businesses, who acted responsibly, the ones left with the money, are going to have to pay.

    Let us not fall into this propaganda trap. The Blame Game. People with mortgages are “irresponsible”. People with credit card debt caused the Crash. Speculating banks with securitized derivatives were blind to the risk. Fannie Mae made bad loans. Capitalism and the free market failed. We must find the bottom. It’s all hooey, you know.

    It’s all hooey. Really. There may be “bubbles” but real estate is not one of them. Real estate is real wealth. The money is funny but real estate is real. There may be a TEMPORARY downturn in the real estate market, but believe me, it will be short-lived.

    Nobody is “going to have to pay”; everybody is. You are not going to be taxed one penny more than before. In fact your taxes are going DOWN. Kwitcherbitchin. What is going to happen, and it’s already started, is runaway inflation. That’s a tax on money. And it’s not because of bank failures; inflation is caused by runaway government deficit spending.

    Everybody suffers from inflation, but the people who suffer the most are the unpropertied. If you don’t own real estate then buy gold. Gold isn’t as good because gold can be mined. There is no new real estate being created.

    The cause of our economic woes, if you want to blame someone, is the wild deficit spending by the Congress and President. They are acting like crackheads with a book of blank checks.

    Government spending does not “create jobs”; it drains and consumes the wealth of the nation. It also debases the currency.

    Stop blaming your neighbor, the poor, the borrower, the homeowner, the bank. Aim your arrows at the true culprit. It’s Chuckie and the spend-a-billion-a-minute gang.

  11. Mike D:

    “. . . those of us with the foresight to acquire real wealth, i.e. real estate.”

    So I take it you have several acres, with apples trees, a cider press, chickens, a half-acre of soybeans, and maybe a pig? Because if all you have is a house and a lot, their value bobs up and down with the rest of the “fiat wealth” economy. Sure, it’s a roof over your head, but in case someone turns off the gas and power (which prices also bob up and down w/ the fiat economy), do you have a woodlot for firewood (assuming you have a wood-burning fireplace that can actually heat your house), and a lifetime supply of candles or oil lamps? Candle making & lamp oil production haven’t been major industries for at least 150 years (or you could make your own with the tallow from your pig – just don’t forget to save some for soap).

    Your cash crops & livestock could be bartered if things really went south, so those at least are “real” wealth, but you’d need to get them to market. If someone turns off the oil spigot, do you have a horse and wagon, and a barn to house them and a field to grow fodder?

    Face it: Real Estate wealth is only as “real” as the economy it floats on (or sinks with).

  12. PaddikJ,

    Yes I do have that stuff. All of that except the pig, but I might get a piglet to fatten up in a month or two. Gas and diesel to power the farm implements are desirable but not absolutely necessary. I don’t have a horse but my neighbor does. I can wheel my goods to town in a cart if it comes to that.

    But more importantly, what is wealth? Wealth is goods, property. Money is a symbolic measure of wealth, a medium of wealth exchange, but the map is not the territory. Some wealth is transitory; it has a short shelf-life. Other wealth is more or less permanent, like gold, jewels, and art that doesn’t rot. The most permanent form of wealth is real property. Not only does it not rot; property can produce more wealth, as you noted. Property is like a machine. Add sunlight and rain and wealth grows on your trees (unlike money, which does not grow on trees).

    Property retains its intrinsic value no matter what the economy does. As long as the sun shines and the rain falls, anyway. As long as the property isn’t destroyed by carpet bombing or toxic wastes, and as long as social rules of tenure, tenancy, and use are not catastrophically ripped away from the landowner.

    Everybody needs shelter from the storm. Houses on tiny lots don’t grow potatoes, but they do provide shelter to the residents. Most people don’t live under bridges or out in the elements, so housing is a necessity. Even in a sinking economy. So is food. You can’t eat money.

    Our civilization operates on the production of wealth from property, just like all civilizations. Food, clothing, lumber, etc. don’t appear in the stores by magic. They come from somewhere. That somewhere is property.

    Survival depends on property. If you have none, you must rely on those who do. That’s the way the world works. If you ate today, then hug a farmer. If you shelter in a wood-framed house, send your local forester a thank-you card, and maybe a six-pack of tall cold ones so he knows you really mean it.

  13. The next Republican candidate needs to emphasize just one thing to win: just government. When money passes from taxpayers, through the government, and to the beneficiaries, liberals have intentionally transformed the source of the money from the individual taxpayers to the all-generous government. We need to reverse that understanding of fiscal spending. When government raises taxes on a successful person to give money to an unsuccessful person, we must treat it as a direct exchange between the two and ask if it is just for an outside party to force the exchange. This must be the test for fiscal policy.

  14. Property taxes are the oldest form of taxes and yet the most progressive!

    The original tax, so far as we know, was a tithe of crops.

    That tax and current property taxes are based on wealth, real wealth. The more wealth you possess, the more property tax you pay. What could be more progressive than that?

    btw, if property values have fallen, then I expect my property taxes to go down, since they are based on a percentage of fair market value. Of course, the Tax Assessor is a little bit slow, a good thing in normal times but not so good during the very rare deflationary periods such as we have experienced over the last six months.

  15. Mr Briggs,
    Here’s financial/property advice from someone with no training in the subject and who clearly knows less than you about everything, or whatever disclaimer I should write.

    Saving to buy?
    Why not do so now, while everyone’s in a panic?
    Take out a mortgage.
    Don’t expect to be able to afford to buy outright, but understand the terms and implications long term including your own job security and your own prospects for future work.
    Buy modestly.
    Buy the worst house on the best street.
    NEVER pay the asking price, regardless of the state of the housing market or your own optimism, and ESPECIALLY if you love the place, here’s where you have to be careful, you’re better off being slightly disgruntled because you know it will be a head not a heart decision.
    Don’t buy in a hurry.
    If it takes time to find a property that meets these criteria then take it and start soon.
    Don’t let pride get in the way at any stage.
    If you don’t start looking now, the bargains will be harder to find both in terms of the mortgage and the property price. You might not want to buy right away, but if you only start looking when you are, you’ve lost ground in terms of local knowledge of the market and knowing a bargain from a headache.
    One more thing never let the agent know what you are prepared to pay, ever. Let the agent think you are unyielding and shrewd even if you’re blond, five foot four and look like you were born yesterday.
    Those rules may be modified if the property in question is the dream home or the place you plan to stay in for many years, in which case you may pay the asking price, assuming your secure in your work. It won’t matter if the value drops.
    If you’re selling, NEVER tell the agent what you’re prepared to accept for your place.
    They WILL take this as the unofficial asking price. Of course if you’re selling, it’s a different ball game entirely. It’s not because agents are bad people, they get anunffairly bad reputation. They don’t care as much as you if you pay a few extra thousand they want the transaction to go through at any price.

  16. By the way, almost everybody pays property taxes, whether they rent or own. The only people who don’t are the homeless and those who live in tax-exempt government housing.

  17. Joy, you mean it depends on who wears NO trousers?! My bad. ^_^

    You know, if the mama/wife is happy, then everybody is happy. I am speaking from my husband’s experience. ^_^

  18. Mrs JH,

    To think I mistook you for a man all that time.
    Is that a carrot at the end of your comment?
    What does the double carrot thing you keep posting stand for?
    I mean, what does it mean!

  19. Mike D:

    Thanks for the Thomas Jefferson primer, but you missed my point (I think). If you’re of the .01% of the population that owns their property free and clear, and have enough of it (arable, of course, with the neccessary equipage) to grow your own wealth, great. But do you also have a couple dozen mini-guns, portable generators, ammo, and the personnel to person them should things go really south and the other 99.99% of the population descends on you like a swarm of locusts? Because ultimately, ultimate sources of wealth notwithstanding, that’s what this discussion is about – otherwise it’s pointless.

    If I really thought economic armageddon was at hand, I’d try to buy a trainload of canned fruits, meats and vegetables, find a nice defensible cave somewhere and set up shop. Essential goods, m’boy, essential goods.

    The vast majority of us – and our real estate – are creatures of the marketplace, by whatever currency it uses, and subject to its whims.

    ============================================

    William,

    I think the best of Joy’s advice is the bit about looking for neglected properties in good neighborhoods. You don’t want to have a great house in a rundown neighborhood, and you absolutely don’t want to be a pioneer – pioneers usually end up full of arrows. If you have the time and energy, and like to build things, there are several good books on renovation for fun and profit. It’s a buyers’ market and there should be good deals, even with Nanny Government bailing out the wastrels. May as well avail yourself of any stimulus package goodies to be had and pre-recoup some of the taxes your kids will be paying on them.

  20. Am I allowed to feel at all slightly smug in that I foresaw the UK housing and economy collapse so sold my flat in London at a tidy profit?

    I also foresaw the problems it would cause the UK markets and so emigrated with my wife and children to New Zealand. While the economy down here isn’t doing brilliantly it is holding up and at least it is possible to get a return of 7% on my cash with a government guarantee that I will get my money (and interest) back if the financier went broke.

    Furthermore as New Zealand isn’t borrowing stupendous sums and so my children won’t have to pay rediculously high levels of tax in order to repay the debts of their grandfathers.

    Actually I don’t mind if I’m not allowed to feel smug – I do anyway!

  21. James,
    No, things aren’t that bad over here, So your smugness is a little overblown but I don’t want to burst your bubble.
    New zealand also happens to be one of the nations that has bought wholheartedly into the green nonsense. Perhaps because they are a nation of sheep farmers they thought It’d be easy to acquire maximum brownie points on that issue.

    However, I’ve been checking the prices of flats in Epping and so far with all the panic, prices have dropped about five percent.
    Hardly too bad seeing as they had been growing at thatsort of price each year for some time.
    I bought at what some would say was the worst possible time, in Oct 07.
    However, I stuck to my criteria and am a long way from beeing out of pocket.
    Prior to that I was paying MORE to rent about five streets away.
    My point to Mr Briggs is that rent is dead money, gone forever.

  22. Joy:
    Have you researched all aspects of the NYC housing market? Your advice is not something an intelligent person doesn’t already know. This kind of unsolicited advice can feel like an insult and is often worth every penny people paid for it. Offering expert advice whenever it’s solicited is better than blowing your own horn.
    This is not your blog. Make your point brief and resist the urge to hijack the comments and respond to other readers’ comments. Have a real social life. Take my advice, young lady, especially if you are single.

  23. Prof. Briggs:

    Sorry to have let so many interesting comments get in between — I hope this isn’t hopeless lost from the earlier comment and reply!

    I suppose I forgot to put my point up front (which is my common practice) — which was (and still is) that the administration’s home mortgage program is wildly and completely detached from any of the causes of the current economic mess, and thus can have absolutely no predictable impact on any of those causes. And because of its invalid assumptions, it is all too likely to create even more problems as it goes along…

    That reasonable people see it as a personal insult as well as a tremendous waste of money creates even more stress and confusion in the nation’s economic life. Not a good thing by any stretch of the imagination!

    If there is anything good coming of this, it would be articles like one I just read in the New York Post by Alan Reynolds — I’d love to get my hands on the database he used just to verify his conclusions and find more tidbits of intelligence on my own! At some point, one can only hope that intelligent review of pertinent facts will emerge and the dreadful pall of simple opinion will diminish… At least that’s my hope!

    BTW — please keep up this wonderful blog! I’m sure it imposes a lot of work on you, and only hope that it’s as much fun for you to write as it is for folks like me to read!

  24. Hey Joy, click here to watch two (old) men toot their horns. Just for you, in addition to my silly wrinkly smile ^_^. I know that people have probably heard or seen it before; I am posting it anyway. Gotta go now.

  25. JH,

    The man on the piano made me chuckle. Was he singing or did he have his foot caught under the piano leg?
    If I had a horn, I’d definitely get someone to blow it for me. (I don’t know how to play.)

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