As Congress moves ahead with efforts to fix the mortgage mess — and head off another million or more foreclosures — a lot of readers are wondering: Why should homeowners who got in over their heads get help from the government?
My question is this. It seems to me that too many people in this country are getting a free pass with this mortgage mess. I, for one, got a 30-year fixed loan, paid the fees, pay my mortgage on time and so on. But all these people who took the easy way, low payments for two years, zero down etc., are basically getting bailed out in some form or another, whether it be mortgage companies rewriting their loans, or doing a short sale. Where is my free money for doing it the right way in the first place and paying my bills like I agreed to?
— Dave B., Sultan, Wash.
It’s absolutely a fair question.
There’s no doubt that some of the people who are now losing properties to foreclosure entered the market at the height of the boom, put little or no money into the transaction, planned to make a quick buck, and then got burned when the music stopped. They made a bet and lost. The government shouldn’t be expected to help them any more than it should be helping out losers at the craps table in Las Vegas.
The problem is that the lending boom — and in its latter stages it was a lending bubble, not a real estate bubble — swept up a lot of people whose only mistake was trusting a mortgage broker or lender who promised to get them started on the path to homeownership and then wrote them a loan that they knew was unsustainable. Is it really plausible that a novice homeowner could somehow dupe a chain of financially sophisticated players that included mortgage brokers, lenders, Wall Street firms packaging these loans into securities and the investors who bought them?
Unlike those of us who may be on our second or third mortgages, or who learned the hard way that some “trusted professionals” are neither, many first-timers got suckered. I’ve heard from hundreds of readers and talked to dozens who fall into this category. The issue of “personal responsibility” seems irrelevant when the transaction was so complicated it flummoxed even the Wall Street investors who bought these loans and are now writing off hundreds of billions of dollars.
It turns out that, so far, very few mortgages have been rewritten with more favorable terms. True, there are short sales going on, in which the homeowner sells the house before foreclosure begins and the lender agrees to take less than the loan’s full value. But many of the appraisals on which those loans were based were fraudulently inflated — to benefit the lender and mortgage broker, not the buyer. In any case, I’m not sure how a short sale qualifies as a bailout: The homeowner loses everything.
It’s also worth considering the “bailout” that’s been extended to the lenders who made these bad loans in the first place. Even before the $30 billion taxpayer-backed rescue of Bear Stearns, the Fed had been flooding the banking system with cheap money to help lenders recover from the bad decisions they made. And in many cases, these loans were so highly "leveraged" — made with borrowed money — that the investment bankers churning them out had essentially no money down either.
At some point, you also have to consider the issue of protecting the value of your home. If another 1 million to 2 million homes are foreclosed in the next 12 months, it’s hard to see how the housing market will be able to recover. That means the value of all of our houses will continue to fall and the economy likely will slide along with them.
Think of it this way: If your house was in the path of a wildfire, would you object to the fire department putting out the fire on your neighbor’s house to protect yours?
I've put most of my retirement money in silver and gold. Everyone tells me this is a folly, for those precious metals have had their run in high prices. However, because of global inflation, I just don't trust currencies anymore and feel that true value is in the good old precious metals. Am I being totally reckless?
— Allysa H., Fords, N.J.
Well, not totally.
It’s true that if inflation gets out of control again, precious metals should hold their value as the buying power of paper currency erodes. It’s also true that after an unusually long quiet spell, inflation seems to have perked up a bit. Precious metals are also seen as a refuge when the economy hits the skids. In countries where political instability or financial market meltdowns threaten to erode wealth, precious metals can be an effective place to hide.
The result has been a stampede to gold and a resulting surge in gold prices. Since the beginning of 2006, gold prices doubled to more than $1,000 an ounce before pulling back to $900 in the past few weeks. “Gold bugs” — the folks who seem to believe there’s never a bad time to buy gold — would like see that pullback as a good time to buy.
But the conditions that send gold prices higher can also reverse course and send them back down again. We’ve seen this movie before, and for many “buy and hold” gold investors, it ended pretty badly.
The last time gold prices went through the roof was at the tail end of the 1970s, a decade that produced one of the worst inflationary spirals in modern history. Heavy government spending on social programs and the Vietnam War, along with an easy-money Fed in the in early 1970s, touched off a decade of inflation that defied repeated government efforts to thwart it. Soaring oil prices compounded the problem.
Gold prices responded accordingly. At the beginning of 1979, an ounce sold for $200 and then rose more than fourfold in a little over a year.
But it turned out that the direst predictions about inflation and the economy didn’t pan out. After the Volcker Federal Reserve slammed on the brakes, pushing interest rates as high as 20 percent, inflation began to subside. Oil consumption began falling after cash-strapped homeowners weather-stripped their windows and drivers sick of lining up for gasoline traded in their cars for more fuel-efficient vehicles. As oil consumption fell, so did prices.
It didn’t take long for gold prices to come crashing down as well. By the middle of 1982, the economic storm clouds began lifting, the stock market began one of the biggest bull runs in its history, and those $850 ounces of gold were soon worth $300 apiece. Two decades later, after some ups and downs along the way, gold was still selling for $300 an ounce.
There’s nothing inherently foolhardy about any individual investment category, whether it’s stocks, bonds, real estate or art. Even rare Beanie Babies had their day on eBay. What’s risky is putting all your investment chips into the pot on a single bet. All of these investment categories have their ups and downs, and no one can predict with any accuracy when they will come.
It’s impossible to know how this surge in gold prices will end. (Keep in mind that the people who speak with the greatest confidence about an investment are often the ones selling the very investments for which they claim great forecasting ability.)
So as long as you understand that gold prices could come down as fast as they’ve gone up, go for it. If inflation spirals out of control and the global financial system collapses, you’ll be sitting pretty.
Then again, if that happens, you’ll probably have more to worry about than the price of your gold.