The problem is the current bailout makes it difficult to determine what is deflationary and what is inflationary. Loans based on fractional reserves are inflationary. Normally, the default of a loan (fractional reserve inflation) would be deflationary because the backing of the loan is/was privately owned (stock, etc.). A default reduces the money supply. However because of the government bailout, some percentage of the default will be covered by the Gov’t. This will be covered by the Gov’t creating bonds and sending them to the Fed to create money out of thin air (real inflation), with interest of course. The Govt is trying to make up for the deflation of the housing and stock market by creating money out of thin air. Before it was paper assets that were inflated (mortgages, stocks), now it will become currency. So The other percentage of the default is/was covered by the BK of mortgage firms, banks, the stock market drop and the Fed direct bailouts. Lyra, you are half right.
I also understand SD Realtor’s angst about this whole mess and its fairness. It wasn’t fair on the way up based completely on falsehoods. I don’t think one could expect it to be fair going the otherway either. You may not see your just reward for taking the high road in this life. It is what it is… However, I see it slightly differently. I don’t see much diffence between these two situations:
1. A growing family with very good credit wanting to purchase a home in 2001/2002 only realize that the housing market is rising faster than they could possibly save a down payment. Understanding that the market could not withstand this very long decided to wait it out until the market returns to reality. So they rented until 2009 and purchase a foreclosed home with 30 yr mortgage that they can afford.
2. A similar growing family with very good credit wanting to purchase a home in 2001/2002 only to realize that the housing market is rising faster than they could possibly save a down payment. Not being sure that everyone in the media and RE industry was promoting increases was correct, decided to purchase in 2005 using an unconventional loan with as much down that they had. After struggling for 4 years to make ends meet and almost ready to give up and go into foreclosure, the government allows loans to be recast in 2009 with principle reductions. The family still with very good credit will now have a 30 yr mortgage that they can afford.
I don’t see #2 as rewarding those who shouldn’t have bought in the first place. If the market would have performed as it should have been normally, both #1 and #2 families would have been able to purchase a home at normal prices without any interferance. The only difference is #2 rented from a mortgage company and #1 rented from a landlord. #2 still probably lost more in the whole process. I personally know several families in the #2 situation. I almost became one of these situations. I was very Lucky In OC…
The individuals that should be getting foreclosed will be the ones who could not afford a standard mortgage in the first place, not family #2. I cannot blame the #2 family for their purchase. Only those with very specific knowledge of how these things work (Piggs) came out better than most. Even most in the RE industry got caught up in the hype and are paying for it.
I also agree with CA renter likewise… the recast needs to be recorded as a new sale which would also reset the taxes to the lower price. Owner’s who could affort the home at the current value are likely to be have been able afford it before the home hyperinflation. If the owners cannot afford the home at the current market value, it should be foreclosed, plain and simple.
