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URL:  http://boards.fool.com/the-real-bail-out-should-be-for-homeowners-who-26101775.aspx

Subject:  Re: I'm laughing, sort of Date:  11/15/2007  10:04 AM
Author:  markr33 Number:  22097 of 35363

The real bail out should be for homeowners who got conned into loans they couldn't pay, and the lenders should be forced to refinance in ways that are payable.

But I wonder how well this would work in practice. Who would truly be helped and who would truly be hurt? Let's look at some examples.

In my case, I purchased my home for $250,000, put exactly 20% down, and took a traditional 30-year mortgage at 6 5/8% for the balance of $200,000. I have been paying that mortgage monthly since the month after I purchased my house. My neighbor, on the other hand, who incidentally earns 20% less than I do and thus can afford about 20% less as well, opted to purchase an identical house across the street for the same price. But in his case, he didn't put 20% down, but instead put 3-5% down, and instead opted for a "fancy" mortgage with lots of "features", one of which was an initial rate of 2.5% (and may have also had the option to pay interest only for a period of time).

So, I've been paying $1280.62/mo to live in the house, and he has been paying $790.24/mo to live in the house. This went on for a few years and his rate rose to 4.5% with a payment of $1013.37 which was just barely affordable for him and caused a few late payments every now and then, but he managed to catch up. But recently interest rates began to rise faster and his rate jumped to 6.5% and may rise further to 7.5% in the near future. And to make things worse, homeowners insurance just doubled! He couldn't afford those payments, and besides that he also has a bunch of large credit card bills, so he stopped paying his mortgage about 7 or 8 months ago. He's still ok on property taxes because the mortgage company already paid them (back in November of 2006) in full for 2007, but they will not make the upcoming November 30'th payment because his escrow account is depleted, so by April 2008, he will be in arrears of his property taxes.

So, now people (including you) are suggesting that the investors that own his mortgage reduce his interest rate from 7.5% to 5.5%, and make it fixed so he can "afford" to stay in his house.

Why do you think that it is good policy to help someone stay in a house that they really can't quite afford? Is this even good for the person in question, with all the other associated costs that are out of his range?

And what if he can't afford 5.5%, do you suggest that they fix the rate at 4.5%?

And what about the property taxes that will be in arrears in a few months, and the large homeowners insurance bill that has gone unpaid, do you suggest that those be "rolled" into the new mortgage, thus raising the principal amount and raising the payment, even at the lower "forced" rate?

Now let's look at who might be affected by such policy. Certainly the folks who lend money for mortgages are going to be much more careful in the future. Careful means that they will charge more for their "product" and that they will be much more careful with the people they loan their money to. This means that the cost of mortgages will go up for most future house purchasers. Not only that, but to make up for the loss of income on the "forced" 5.5% and 4.5% mortgages, they will require more income (i.e. higher rates/fees/etc) from new mortgages.

Why do you think that future house purchasers should subsidize previous house purchasers that purchased more than they can really afford?
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