Biden's comment about adjusting mortgage principle

[mook]

I think your logic is flawed.

The scenario is this. Guy buys a house for $500K/$400K mortgage, pays the mortgage payments no problem. Neighbor goes belly up, gives "$500K" house to the bank. Bank puts many houses in this situation on the market, glut. Fair market value (supply way > demand) drives price down to $200K. The "good" guy can't sell his house, because he would have to pay $200K just to clear the mortgage from the title. Not only is his $100K equity gone, he loses $200K out of pocket or he's stuck in his house forever. The bank gets $400K - $200K (sales price) from the bailout.

IF the govt. does the McCain plan, the bank puts many houses on the market, drives price down to $200K. Govt. would buy down the "good" guy's mortgage to $200K - $100K (down payment). He is made whole, can sell his house at fair market value ($200K) and walk away with most of his down payment (minus commissions and other fees). Bank gets the buydown amount of $200K. Same as first scenario, BUT the "good" guy gets cheaper mortgage payments (more disposable income!), bank gets the same money, and the housing market in the neighborhood now has a floor under it; prices for all houses should settle at $200K.

Hmmm. I need to think about this.

Aren't you assuming that the "floor" of $200k is indeed the proper price for that house? How does the government know that this particular house isn't overpriced by just 10%? If the government buys out that mortgage at 50%, isn't it just giving away a huge pot o' cash? Sounds like a huge fraud potential to me.

Also, what if the market will really only support $125k houses in that particular neighborhood (because that's all those people can afford when you throw out the financing games that got us into this mess)? Won't the settling price at $200k still be too rich for many people's blood? Wouldn't we be better off letting the actual market set the price for the real value of the home?

Sorry if I'm being thick here.

 

[Denny Crane]

Hmmm. I need to think about this.

Aren't you assuming that the "floor" of $200k is indeed the proper price for that house? How does the government know that this particular house isn't overpriced by just 10%? If the government buys out that mortgage at 50%, isn't it just giving away a huge pot o' cash? Sounds like a huge fraud potential to me.

Also, what if the market will really only support $125k houses in that particular neighborhood (because that's all those people can afford when you throw out the financing games that got us into this mess)? Won't the settling price at $200k still be too rich for many people's blood? Wouldn't we be better off letting the actual market set the price for the real value of the home?

Sorry if I'm being thick here.

Seems to me the price would be set by the market. The banks would put up the houses for sale and we'd find out what the sales price is based upon what people are willing to pay. Adjust bailout and buydown figures accordingly.

The whole point is to create a stable priced market for houses and let things grow from there.