The Mike Anderson Site Blog

Bailout or Rescue?

I am intrigued by the details of this subprime bailout.
The mechanism of the bank foreclosure is critical to understanding what is likely to happen to our $700,000,000,000.

Banks (any financial institution holding the mortgage) incur a large number of negative cash flow items when they move to foreclose on a property:

• property taxes
• home insurance
• hazard insurance
• grounds maintenance (lawns etc.)
• home maintenance (cosmetic repairs and functional repairs)
• lawyers fees to file motion to foreclose and evict
• removal of items left in the vacated home.
• utilities (prevent freeze in winter)
• real estate fees
• lawyer fees to transfer title etc.

This is a double whammy because in normal times all of these items are zero cash flow items from the bank’s perspective.  They receive positive cash flow from the monthly payments – double trouble.
With the large number of at risk mortgages in any one bank’s portfolio, it was almost impossible for most banks to follow a normal timeline for foreclosure. Not because they were being compassionate, but because they could not afford the costs of executing the foreclosure (listing above).

We were sold the idea of “rescue” versus “bailout”. It was implied that the reason for the bailout was to keep people in their homes. BS.
Did anyone ever mention any limits on the type of home or homeowner that would be eligible for this special treatment? And it was special. The law allows for past forgiveness, payment initiation period, reduced principle and reduced interest rates. Does this mean that someone with a $1,000,000 subprime, no principal, mortgage could have the principal of that mortgage reduced to say $500,000. Could the owner of this home be someone making $250,000 per year? I did not see any limiting conditions, do you?
Could the property involved be a set of 6 townhouses? Maybe the owner did not do the math on the investment properties correctly? Could the Treasury Secretary decide to reduce his principal and interest rate?

Wait, it gets better. To simplify and expedite the bailout, it has been suggested that the Treasury just write a check to the banks. Let them deal with the individual properties. But if this happens, then the banks will just proceed with the foreclosures. Use our money to cover the out of pocket foreclosure expenses. Wait a year or whatever until the housing market rebounds. Then flip the houses for a profit. It is “pay off your friends in the banking industry” time.

Tags: Bank Foreclosure, Cosmetic Repairs, Grounds Maintenance, Hazard Insurance, Home Maintenance, Home Utilities, Lawyers Fees, Maintenance Lawns, Negative Cash Flow, Positive Cash Flow, Principal Mortgage, Subprime Bailout, Treasury Secretary