Tuesday, December 4, 2007

Let me see if I got this straight..., today I read that Treasury Secretary Henry Paulsen wants to temporarily expand the tax-exempt bond programs of state and local governments, so that they can refinance mortgages. Let me think about that for a minute.

We got into this mess because banks were lending to people that they shouldn't have, or lending more than borrowers could pay. It caused a high enough foreclosure rate that nobody could sell mortgage-backed securities because the buyers didn't know what they were worth.

Now, it will be tax-free municipal bonds backed by the same loan principal, lent to the same borrowers.

If it's done under the same (or similar) terms as the original loan, haven't we just done to the municipal bond market what we did to the secondary mortgage market?

If the new loan terms are substantially better than the old terms, aren't we penalizing people who were responsible, and have paid thousands more for a conservative, conventional 30-year fixed?

People like me?

I just bought a house. Big one. Nice one. I love it. But you know what? If I had taken what I currently pay on my 30-year fixed mortgage, and used that for an 80/20 interest only loan with a teaser rate, I could have afforded a much bigger, much nicer home. But I didn't do that. Wanna know why?

Because I knew I couldn't predict the future, and I might find myself in a situation where I was being forced to refinance, and I either didn't want to (high rates), or I couldn't (no job).

Now, it sounds like people who weren't as cautious as me are getting a do-over.

Can I have a do-over please? I'd like to be qualified for a loan the way people were over the last few years (no income verification, liberal repayment schedule), and I'll buy a much bigger house. 80/20 interest-only with a teaser, please. Where I'm at, the housing market is still very strong, but in the event I can't sell my old house, I want to be bailed out by the government. If my circumstances change, and my payment goes up, and I can't afford the loan that I agreed to, I want to be bailed out by the government.

And why stop at homes? Can we do this with my mutual funds, too? If I invest all of my money in a precious-metals fund, and gold stops its historic run, can the government make up the difference for me? And what about bonds? What if GMAC goes bankrupt, and my GMAC bonds are near-worthless? Can the government cover my cost? Even better, can the government cover my expected gain?

I think you can see where I'm going with this. Taken to the extreme, these government bailouts of risk-gone-wrong are simply unsustainable.

While I am sympathetic to those who agreed to terms that they could not understand, and to those who were manipulated by unscrupulous lenders or brokers, I simply cannot ignore reality and conclude that the government should wave its magic wand and make the problem go away.

Here's a Reality Check: turning a private-sector problem into a government problem DOES NOT solve the problem.