MB Civic

The Subprime Sucker Punch
By Brad Parker
2/15/08

So, what to do with all of these homes going into foreclosure? Let them go. That’s right – walk away from the house. Wait a minute – you are thinking. Are you suggesting that all of these Americans just drop their mortgages and give up on the American dream? No – I’m not. They should realize that, by staying in their dream, they would only wake up to discover that it is a nightmare. The price they bought their home at will not be realized again unless they stay put for maybe up to ten years. Most of these homes were sold to Americans who couldn’t afford them and most importantly at prices that were inflated 100% above what they should have been selling at. These Americans were suckers in a scheme with many deceivers but the sucker punch that will hurt the most is if they stay and continue to pay for all of that equity which does not exist.

Just as in the 1990’s speculative real estate bubble, prices on real estate in the last ten years were gamed by the sellers, flippers and every financial player and institution to create more and more wealth on paper. Rather than continue with sustainable 1 to 2% growth in home values, the rise in prices reached breathtaking double-digit heights in the past two years to as much as 28% year over year in some regions. That type of appreciation is of course unsustainable. Certainly, every player in this giant greater fool scheme knew that didn’t he or she? Well no, they did not.

The greater fool was, as it usually is, the buyer, especially the low-income buyer. Thanks to predatory lending practices, which prey upon low-income, elderly and minority buyers, the lenders were able to create an entirely new group of buyers to fuel their scheme. Some of these buyers may have sensed that buying homes worth hundreds of thousands of dollars with no money down, bad credit and ballooning payments looming on the horizon was a mirage but their need to have a part of the American dream of home ownership was too great. Probably, the largest numbers of these buyers were recklessly unaware of the dangers inherent in their purchase.

So, here comes the Congress to save our hapless fellow citizens. They will do whatever is necessary to keep these good folks in their homes. But wait – this is the bubble inside the bubble - if you stay in your home for let us say, the $300,000 price at which you purchased it. Meanwhile, all of the homes around you are revalued down 30% or perhaps as much as 50%. Then you are left holding the bag for equity that no longer exists. Equity it will take years and years to just get even with. Why would our saviors from the DC Swamp punish the distressed even further? Because dear reader – the myriad lenders and holders of the bad faith paper that the home mortgages were rolled into would be able to save their sagging fortunes on the backs of the suckers. The big guys bottom line would stabilize while ours would disappear into limitless debt. Now, that’s a true roundhouse sucker punch.

Inevitably, the proud and bellicose defenders of free markets, lassiez faire capitalism and neoliberal economic policy bristle at the thought of government intervention in business unless and until it comes time to save them from their failures. Then, you and I get to bail them out – think: the Savings and Loan debacle. Yes, smaller non-interfering government is the way to go, trumpet the strumpets of Wall Street but if necessary the public must and will pay the price. That time to save those who refuse to help us with government programs that could help these very same citizens get a real home at a realistic price is here again. At least that’s what we are being told.

I favor another approach to this meltdown. Let the people who created the scheme pay for it. Any and every financial institution and lender who participated in the bubble should be left holding the bag along with the buyers, even the ones who were suckered into it. If the Congress wanted to help, really truly help, the buyers, they should enact a program that let’s the buyers default without any harm to their credit rating. Housing prices should be allowed to revalue - decline – and the so-called market should be allowed to fail. If no one pays a price for this deregulated and over speculated financial mess then people will try it again and soon. Buyers who walk away with their credit unharmed will be more financially solvent when the market bottoms out and the home they buy at that point will have a realistic price tag.

Let the free market triumphalists swallow a big dose of the nasty medicine they love to talk about but rarely consume. Let the market and it’s failure work. Let the American citizens live to dream another day without paying the bill for the sucker-punch crowd.