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Why couldn’t they have prevented the systemic collapse simply by bailing out the individual homeowners? If they had gotten bailed out, so would have their banks

Why couldn’t they have prevented the systemic collapse simply by bailing out the individual homeowners? If they had gotten bailed out, so would have their banks.

floor2 5y ago
Ethically, that would have been even worse. People rage against the banks, but it's important to remember the actual fraud was happening at the homebuyer level. Millions of people were buying houses by lying on their mortgage applications about their incomes and assets, getting interest-only mortgages they could barely pay, and hoping to sell the house for a profit before their fraud was discovered. When the market moved against the fraudsters and they got caught with houses they couldn't pay for that were worth less than they owed, which is why they started defaulting on their payments. The victims weren't the people who quit paying their fraudulent mortgages, the victims were the people who were deceived into loaning them money.
- Jtype 5y ago
  According to statista.com 5.2 million homes were sold in the US in 2007. Do you seriously believe that 30%+ of these sales were intended as investment only? Even if that were true it would have been more ethical to bail out the home buyers than the banks themselves. The majority of people who lost their homes ended up over their heads through no fault of their own.
  - mlac 5y ago
    You would have had moral hazard with home buying, and people would have been incentivized to pay a lot more for their homes because the likelihood of a bailout would be good. At least with a central approach, regulators could come in and monitor. There wouldn’t really be a way for regulators to check home prices / the free market at such a massive scale.
  - floor2 5y ago
    People lied on their mortgage applications, claiming to have incomes and assets they didn't have, so that they could take out massive loans they could never repay. The loans were structured to have low payments initially and then larger payments later, which the fraudulent actors were ok with because they expected to flip the house before the larger payments were due. That is what caused the mortgage crisis. To pretend that people committing fraud lost out "through no fault of their own" makes no sense, it's entirely their own fault. Legitimate buyers wouldn't be impacted- if a person buys a house to live in it, and pays for instance $3,000 per month, then the market price after purchase doesn't matter. They still live in their house and they still pay $3,000 per month. Maybe you weren't around at that time, but there were a dozen different wildly popular TV shows about people flipping houses, people were buying houses with zero down payments, buying houses they couldn't afford because "real estate always goes up" and advice to "buy now and refinance in 6 months when the price has gone up" and all sorts of other greedy, speculative behavior. Houses in 2007 were the cryptocoins of the day, but with massive leverage by lying on mortgage applications.
- catlikesshrimp 5y ago
  The fault is still the bank's. The bank is responsible, and charges for, checking the numbers. They allowed themselves to lose money and were rewarded for it.
  - starfallg 5y ago
    That's not across the board. In the UK, banks were bailed out in exchange for equity. So there are fairer ways of handling this.
- naasking 5y ago
  Amazing rewrite of history. Mortgage lenders knew it was bad debt but gave out money anyway, hedge funds that repackaged those mortgages knew it was bad debt but tried to aggregate lots of bad debt into somehow becoming "good debt", credit rating agencies gave these packaged bad debt gold star ratings knowing all along that it was bad debt, but really it's all the people's fault. Nope, nobody along the chain had any responsibility for enforcing any kind of professional standards. I mean, it's not like we have systems in place to check things like "lying".
  - floor2 5y ago
    I'm confused by this response. Are you trying to argue against me here? It seems like you are, but you're talking about a bunch of unrelated things to my statement (which I agree with you on). The initial fraud happened at the level of people lying on mortgage applications. I'm not suggesting there weren't all sorts of failures of regulators and credit rating agencies, nor that many of the financial institutions involved in trading these assets weren't complicit in perpetuating the fraud. I'm just pointing out that "bailing out" a person who committed fraud when taking out a loan isn't a good thing for society to do. I'm not trying to let anyone else off the hook for their roles in the systemic problem.
    - naasking 5y ago
      > I'm just pointing out that "bailing out" a person who committed fraud when taking out a loan isn't a good thing for society to do. Ok, and bailing out the financial institutions and traders that perpetuated that fraud "isn't a good thing" either, AND you said that what the home buyers did was "worse" for "reasons". Except all of the reasons you listed are exactly what those traders and financial institutions also did, and arguably they have professional duties not to do those things and to in fact report them. You're also neglecting that home buyers aren't professionals in this, they're supposed to be guided by the professionals, but the mortgage lenders were encouraging people to inflate their assets as standard practice. Where you lay the most of the blame on this issue honestly blows my mind.
ImprobableTruth 5y ago
How do you 'simply' bail out millions of homeowners?
- saganus 5y ago
  The government could ask the banks for their list of debtors, and then transfer an amount of money equal to the sum of all debts, on the condition that the banks write off said debtors, no? Not sure what side effects this could cause but it seems possible in principle.
  - ImprobableTruth 5y ago
    Well, normally a bailout doesn't involve just giving people money (the bank bailout was a loan), but you could do that, it'd be a massive cost however. The biggest winners would also be those with terrible loans/those who issued them. Alternatively, you could just give all homeowners a loan instead - but this doesn't change the fundamental issue of subprime mortgages, so it would really just be pumping up the bubble further.
    - saganus 5y ago
      Ah, I see what you mean by "simply". Yeah, I guess there's definitely a ton of side effects depending on which way you go. However, the optics of giving banks more "free" money at the expense of "the people" is not good regardless. I wonder what would happen if the government extends almost-free loans to whoever has a mortgage. I imagine a lot of people would use it to pay it, but probably a ton more would just use it to get a bigger TV, a car or something similar. No way to win either way it seems.
- AussieWog93 5y ago
  >How do you 'simply' bail out millions of homeowners? Simple three step process: - Be the leader of the CCP - Declare that the homeowners will be bailed out - Sit back and watch while your entire society restructures itself to bail out homeowners I'm only half-kidding; this kind of stuff has been done time and time again, side effects be damned.
LatteLazy 5y ago
There are three answers to this. The first is that the us mortgage market is 10Tn. So it would have been required a 10x bigger bailout to do it directly. The second is that someone has to decide who get a mortgage and one what property and at what rate etc. The government would need to do that too. And it seems cheaper and easier to use the existing companies that get the fed (?) To hire 1m real estate people and managers etc. Reason 3 is that that would have been fine for mortgage holders. But what about everyone else who used those banks? Commercial loans, bon mortgage debt, insurance services, a whole bunch of very important economic processes would have suddenly ground to a halt. Mortgage holders were the main thing bailee out. But not the only thing.
- naasking 5y ago
  You didn't have to bail out all home owners for the full amount, you could just give out some small amount that will let those who were almost able to make their payments continue to stay afloat, while letting those who wildly misrepresented their assets and liabilities to go under. This would still ripple through and hit those who bought the most truly bad debt, but that's how it should be.
  - LatteLazy 5y ago
    If you do that some will default (which is the point right?). But then house prices will fall, the economy will falter and interest rates on loans will go up. And when that happens people who were previously fine will suddenly start defaulting too. This is the problem with contagiousness, moral risk etc. If you don't bail out the first (worst) group to default, you rapidly find that people who were fine before are now no longer creditworthy. To be clear, I'm not arguing this is fair or right or "should" be. I'm just explaining the decision that a theoretical politician would face.
    - naasking 5y ago
      > But then house prices will fall, the economy will falter Does not follow. Whether house prices fall and/or the economy falters is not out of your control, nor are they certain. It depends entirely on the choices made in the size of payout, the payout schedule, and enumerable other factors that can be managed to some extent. Home buyers weren't innocent in all of this, but the worst predators were the ones that were bailed out, so the moral risk argument doesn't justify the choices made IMO.

Why couldn’t they have prevented the systemic collapse simply by bailing out the individual homeowners? If they had gotten bailed out, so would have their banks.

floor2 5y ago

Ethically, that would have been even worse. People rage against the banks, but it's important to remember the actual fraud was happening at the homebuyer level. Millions of people were buying houses by lying on their mortgage applications about their incomes and assets, getting interest-only mortgages they could barely pay, and hoping to sell the house for a profit before their fraud was discovered. When the market moved against the fraudsters and they got caught with houses they couldn't pay for that were worth less than they owed, which is why they started defaulting on their payments. The victims weren't the people who quit paying their fraudulent mortgages, the victims were the people who were deceived into loaning them money.

Jtype 5y ago
According to statista.com 5.2 million homes were sold in the US in 2007. Do you seriously believe that 30%+ of these sales were intended as investment only? Even if that were true it would have been more ethical to bail out the home buyers than the banks themselves. The majority of people who lost their homes ended up over their heads through no fault of their own.
- mlac 5y ago
  You would have had moral hazard with home buying, and people would have been incentivized to pay a lot more for their homes because the likelihood of a bailout would be good. At least with a central approach, regulators could come in and monitor. There wouldn’t really be a way for regulators to check home prices / the free market at such a massive scale.
- floor2 5y ago
  People lied on their mortgage applications, claiming to have incomes and assets they didn't have, so that they could take out massive loans they could never repay. The loans were structured to have low payments initially and then larger payments later, which the fraudulent actors were ok with because they expected to flip the house before the larger payments were due. That is what caused the mortgage crisis. To pretend that people committing fraud lost out "through no fault of their own" makes no sense, it's entirely their own fault. Legitimate buyers wouldn't be impacted- if a person buys a house to live in it, and pays for instance $3,000 per month, then the market price after purchase doesn't matter. They still live in their house and they still pay $3,000 per month. Maybe you weren't around at that time, but there were a dozen different wildly popular TV shows about people flipping houses, people were buying houses with zero down payments, buying houses they couldn't afford because "real estate always goes up" and advice to "buy now and refinance in 6 months when the price has gone up" and all sorts of other greedy, speculative behavior. Houses in 2007 were the cryptocoins of the day, but with massive leverage by lying on mortgage applications.
catlikesshrimp 5y ago
The fault is still the bank's. The bank is responsible, and charges for, checking the numbers. They allowed themselves to lose money and were rewarded for it.
- starfallg 5y ago
  That's not across the board. In the UK, banks were bailed out in exchange for equity. So there are fairer ways of handling this.
naasking 5y ago
Amazing rewrite of history. Mortgage lenders knew it was bad debt but gave out money anyway, hedge funds that repackaged those mortgages knew it was bad debt but tried to aggregate lots of bad debt into somehow becoming "good debt", credit rating agencies gave these packaged bad debt gold star ratings knowing all along that it was bad debt, but really it's all the people's fault. Nope, nobody along the chain had any responsibility for enforcing any kind of professional standards. I mean, it's not like we have systems in place to check things like "lying".
- floor2 5y ago
  I'm confused by this response. Are you trying to argue against me here? It seems like you are, but you're talking about a bunch of unrelated things to my statement (which I agree with you on). The initial fraud happened at the level of people lying on mortgage applications. I'm not suggesting there weren't all sorts of failures of regulators and credit rating agencies, nor that many of the financial institutions involved in trading these assets weren't complicit in perpetuating the fraud. I'm just pointing out that "bailing out" a person who committed fraud when taking out a loan isn't a good thing for society to do. I'm not trying to let anyone else off the hook for their roles in the systemic problem.
  - naasking 5y ago
    > I'm just pointing out that "bailing out" a person who committed fraud when taking out a loan isn't a good thing for society to do. Ok, and bailing out the financial institutions and traders that perpetuated that fraud "isn't a good thing" either, AND you said that what the home buyers did was "worse" for "reasons". Except all of the reasons you listed are exactly what those traders and financial institutions also did, and arguably they have professional duties not to do those things and to in fact report them. You're also neglecting that home buyers aren't professionals in this, they're supposed to be guided by the professionals, but the mortgage lenders were encouraging people to inflate their assets as standard practice. Where you lay the most of the blame on this issue honestly blows my mind.

ImprobableTruth 5y ago

How do you 'simply' bail out millions of homeowners?

saganus 5y ago
The government could ask the banks for their list of debtors, and then transfer an amount of money equal to the sum of all debts, on the condition that the banks write off said debtors, no? Not sure what side effects this could cause but it seems possible in principle.
- ImprobableTruth 5y ago
  Well, normally a bailout doesn't involve just giving people money (the bank bailout was a loan), but you could do that, it'd be a massive cost however. The biggest winners would also be those with terrible loans/those who issued them. Alternatively, you could just give all homeowners a loan instead - but this doesn't change the fundamental issue of subprime mortgages, so it would really just be pumping up the bubble further.
  - saganus 5y ago
    Ah, I see what you mean by "simply". Yeah, I guess there's definitely a ton of side effects depending on which way you go. However, the optics of giving banks more "free" money at the expense of "the people" is not good regardless. I wonder what would happen if the government extends almost-free loans to whoever has a mortgage. I imagine a lot of people would use it to pay it, but probably a ton more would just use it to get a bigger TV, a car or something similar. No way to win either way it seems.
AussieWog93 5y ago
>How do you 'simply' bail out millions of homeowners? Simple three step process: - Be the leader of the CCP - Declare that the homeowners will be bailed out - Sit back and watch while your entire society restructures itself to bail out homeowners I'm only half-kidding; this kind of stuff has been done time and time again, side effects be damned.

LatteLazy 5y ago

There are three answers to this. The first is that the us mortgage market is 10Tn. So it would have been required a 10x bigger bailout to do it directly. The second is that someone has to decide who get a mortgage and one what property and at what rate etc. The government would need to do that too. And it seems cheaper and easier to use the existing companies that get the fed (?) To hire 1m real estate people and managers etc. Reason 3 is that that would have been fine for mortgage holders. But what about everyone else who used those banks? Commercial loans, bon mortgage debt, insurance services, a whole bunch of very important economic processes would have suddenly ground to a halt. Mortgage holders were the main thing bailee out. But not the only thing.

naasking 5y ago
You didn't have to bail out all home owners for the full amount, you could just give out some small amount that will let those who were almost able to make their payments continue to stay afloat, while letting those who wildly misrepresented their assets and liabilities to go under. This would still ripple through and hit those who bought the most truly bad debt, but that's how it should be.
- LatteLazy 5y ago
  If you do that some will default (which is the point right?). But then house prices will fall, the economy will falter and interest rates on loans will go up. And when that happens people who were previously fine will suddenly start defaulting too. This is the problem with contagiousness, moral risk etc. If you don't bail out the first (worst) group to default, you rapidly find that people who were fine before are now no longer creditworthy. To be clear, I'm not arguing this is fair or right or "should" be. I'm just explaining the decision that a theoretical politician would face.
  - naasking 5y ago
    > But then house prices will fall, the economy will falter Does not follow. Whether house prices fall and/or the economy falters is not out of your control, nor are they certain. It depends entirely on the choices made in the size of payout, the payout schedule, and enumerable other factors that can be managed to some extent. Home buyers weren't innocent in all of this, but the worst predators were the ones that were bailed out, so the moral risk argument doesn't justify the choices made IMO.