Homeowner Bailout Rewards Irresponsibility

Declan McCullagh: A Failed Real Estate Speculator Gets It, So Why Can't Washington?

(CNET)  This story was written by CNET's Declan McCullagh.

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Perhaps the best argument against a government bailout of underwater homeowners can be found in the character of Casey Serin, a 26-year-old would-be mogul in Sacramento, Calif.

In hopes of getting rich quick, Serin took out $2.2 million in mortgages on eight houses, some sight unseen. He lost all of the properties, most to foreclosure, and says he's recently contemplated living on the streets.

Serin achieved a measure of Internet fame by chronicling his failures at real estate speculation on a now-defunct blog, where an audience of so-called "haterz" spent endless hours critiquing his innumerable financial missteps. After selling his Web site to pay down his then-wife's credit card debt, Serin has had time to reflect on how he and other speculators contributed to the biggest housing bubble in history.

"I personally don't believe in bailouts," Serin said in an interview this week. "If you don't get hurt, what's going to stop you from taking on the risk next time? You're interfering with the natural order of things."

Too bad our elected leaders in Washington, D.C. aren't half as thoughtful as a failed housing speculator.

The reality is, as I wrote in an earlier column, housing prices leapt too high, too fast, beyond what economic fundamentals permit.

This is why house prices are falling back to earth. Speculators have moved on or, like Serin, are courting bankruptcy. Lending standards are returning to normal. Debt has given way to moderate thrift. The supply of homes exceeds demand in many areas; prices will stabilize only when homes become affordable again and excess inventory is sold.

Unfortunately, our representatives seem unable to let a return to normalcy take place.

Taxpayer aid to prevent foreclosures on mortgages acquired by the government was part of last fall's $700 billion bailout. Rep. Barney Frank, a Massachusetts Democrat, now wants that money to be used to rewrite mortgages and reduce monthly payments. Politicians are being egged on by homebuilders, real estate agents and lumber companies that set up FixHousingFirst.com a Web site urging taxpayer-funded "foreclosure prevention" and "discounted mortgage financing" to "increase home values."

That's a little like propping up Pets.com shares during their post-dot com bubble slide toward 19 cents and eventual liquidation.

No matter what Washington promises, homeowner bailouts will aid the undeserving - the Casey Serins and speculators of his ilk - at the expense of the fiscally prudent. Why should Americans who rented and saved their pennies for a 20 percent down payment be taxed to bail out those who gambled and lost? Where in the U.S. Constitution has Congress been delegated the power to hand out such largesse? And do banks and lenders need government help to decide whether writing down loans is better than expensive foreclosures?

This is not politically correct to say, but the reality is that not everyone can afford a house. A fast food assistant manager makes $9.95 an hour, and the median price of a new home sold last fall was around $218,400. With reasonable assumptions about taxes and interest rates, our assistant manager would have $0 a month left over for food, clothing, and car payments. Unless a house is unusually cheap, renting could be wiser.

Yet for at least a decade, the official policy of the U.S. government has been that if you breathe, you qualify for a mortgage. As George Mason University economics professor Russell Roberts noted, that official policy is what created the housing bubble - nonexistent oversight of Fannie and Freddie; the Federal Reserve's artificially low interest rates; the Community Reinvestment Act and its Clinton-era expansion; and a 1997 law that made capital gains tax-free.

In June 2002, President Bush announced "America's Homeownership Challenge" that included $200 million annually for down payment assistance, and $2.4 billion for homes to be sold to low and moderate income families. A year later, Bush proclaimed National Homeownership Month by saying "American values of individuality, thrift, responsibility and self-reliance are embodied in homeownership." (A cranky Barney Frank responded by claiming Bush hadn't gone far enough.)

We know how that turned out. Americans queued up for exotic zero-down mortgages on houses they couldn't afford, with unscrupulous lenders taking advantage of greedy buyers, all with Uncle Sam's blessing. Then came foreclosures and trashed credit and realization that many buyers would have been better off renting all along. (The average home ownership rate from 1970 to 1990 was 64 percent, according to U.S. Census data. Today the rate remains at a historically high figure of 68 percent.)

"Pain is one of the best ways to make change happen," said Serin, the speculator-turned-tell-all-blogger. "If you were just completely reckless about it, you deserve to fall flat on your face. I was reckless. But I don't know what I deserve."

One thing Serin doesn't deserve is a taxpayer bailout. Alas, if Rep. Frank and his political allies have their way with our pocketbooks, others who were just as irresponsible and dishonest will receive precisely that.

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Declan McCullagh is the chief political correspondent for CNET. He previously was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives in the San Francisco Bay area. His e-mail address is [e-mail]

[fairnessrocks]

Here's a funny story: my neighbors lived just outside Washington DC about 8 years ago. They sold their home to move to Michigan to be closer to family. They made a decent profit on their home in DC. In Michigan, they purchased a home and then took out a home equity loan for nearly $300,000 and used this money to take wonderful vacations and trick out their home. After 3 years, the wife decided that she didn't like the cold and that her family was not 'helping out' enough with the kids and she wanted to move south. Her husband secured a job in NC. They purchased a home in NC while still owning their home in Michigan - it was on the market, but not selling. The wife decided that she didn't like the home they had purchased 6 months ago in NC and they decided to build a $550,000 home in my development (using an ARM) - knowing full well that they had the home in Michigan and had just lost a boatload of money on the 'unacceptable' home in NC. About 1.5 years into the newest home, the wife decided that she wanted to live on the lake - so they put a small deposit down on a $300,000 piece of land. After about a month, they realized that they would not be able to afford to build and move again. They eventually sold their home in Michigan but with a $180,000 loss. The bank wrote off half of the loss and the husband and wife were only stuck with $90,000 in debt from the sale - plus paying the taxes on the bank write off (~25% of $90,000). They have just filed bankruptcy and are moving into a nearly 6,000 sq. ft. custom home - what a downgrade. The guy makes at least $120,000. What's worse is that they filed Chapter 11 which doesn't require them to repay any debt. They are truly taking advantage of the system. When you can't manage your debt and are making a steady income of over $120,000 a year, you have serious financial management problems. They are both educated (she has a bachelor's degree and he has two master's degrees - they both served in the Army for a number of years). They obviously did not think through their decisions carefully (i.e. selling the home in Michigan before moving south - or not moving in the first place - or not purchasing a home in NC only to lose $30,000 selling it after a year). So when this journalist states, "No matter what Washington promises, homeowner bailouts will aid the undeserving - the Casey Serins and speculators of his ilk - at the expense of the fiscally prudent. Why should Americans who rented and saved their pennies for a 20 percent down payment be taxed to bail out those who gambled and lost?" I have to agree. These people are in a nicer neighborhood, nicer home and more land thanks to the taxpayers who are shouldering their debt. Nice, huh?

[ConcernedCiti]

This guy is supposed to have "the best argument against the government bailout"? Give me a break! From the line: "Serin achieved a measure of Internet fame by chronicling his failures", it looks to me like he just wanted to look like an authoritative voice on something! Maybe he figured he could recoup his losses with some online revenue. This guy is obviously an idiot! He may have good advice of what NOT to do (Just don't be like him). That doesn't mean he has more common sense than the rest of us. I think he's just bitter because he can't benefit from the "bailouts", since he didn't qualify for a homeowner's bailout because he was a real estate investor. This schmo can't speak for everyone! I can claim that I was able to keep my home, which because of devaluation, didn't qualify for a refinance when the Adjustable rate kicked in; this accompanied by a paycut due to market slowdown in the industry I work in, made me a prime candidate for a loan modification. I wasn't a risky buyer, I just couldn't have foreseen the economic downturn!!!

[LOL_AT_CBS]

Everybody who doesn't buy now will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 25% yearly price increase.

Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities and Hondas.

This asset bubble is different from all of the others - it will never slow down or pop. The gains are permanent.

[btheilig]

Not only are we going to be made to bail out these people who SIGNED THEIR NAMES TO LEGAL CONTRACTS NOT ONCE BUT ABOUT A 1900 times in order to buy homes they couldnt afford, but good ol Barack is also going to limit the amount of money I can deduct from my taxes for MY MORTGAGE THAT I PAY ON TIME. Does anyone see anything wrong with this picture?!? For the love of god why can't people see how wrong this is? Taxation without representation, wheres my representation huh? This is rediculous

[lostcountry1]

we can only hope that someone out there has the evidence that ties bush, cheney ,rumsfeld, condi rice, and all the collaborators, to the killing of americans at the trade towers and pentagon and iraq, and afghanistan,and everywhere else,so as to prove that 9/11 was just a way for them all to make their billions. everything from the day the little brat son stole the white house was orchestrated by this administration to steal money.so anyone who has evidence please come forward on january 21st. ''IF YOU NEVER TELL A LIE, YOU NEVER HAVE TO REMEMBER WHAT YOU SAID".

[lostcountry1]

it is true that many people got greedy and wanted to flip houses for large profits, but if the regulations were in place, the mortgage companies would not have been able to "dangle the carrot'' in front of the mules.the real shame is that diciplined homeowners are being punished along side the greedy ones.it is squarely this administrations fault. bushit and friends have been about nothing but the "systematic fleecing of america" since day one of their reign of terror. it is unbelievable that they have gotten away with soo much. i suppose that if you make enough money from your thefts, that you can buy off any one. sooner or later.

[lostcountry1]

this housing meltdown was all part of an orchestrated fleecing of america by GOUGE W BUSHIT and friends.they deregullated everything they need to, just before they stole all the money.does everybody remember seeing the little spoiled brat liar,standing up on his bully pulpit,and saying "homeownership has never been greater" ?then they set up all the sub-prime loans, and stole all the money.now their bailing out each other so they are assured of getting their big fat bonus''s.i want to know why real estate agents,appraisers and bankers,whose names are on sub-prime loan docs., aren,t being jailed for conspiring to commit fraud? make the criminals pay,not average americans.

[tbbaot]

Home ownership is not some right the government can mandate. It''s a reward for hard work and financial planning. When congress forced banks to make loans to people that didn''t qualify it created most of the mess we see today. Banks of course deserve some of the crdit as well for getting greedy and creating all those so called creative financing schemes.
Homeowners now claiming to be ignorant of the ramifications of signing up for an ARM loan just proves my point. Not all people are cut out to be home owners. They need to rent until they can become financially stable and attend one of the numerous free education classes out there, so they can make better choices the next time around. I don''t want my tax money going to bail out any one.

[perk235]

If these people (and corporations) are bailed out, they should have to take a course on how to handle money; there should be restrictions placed, and someone should oversee their practices.
Posted by erlindab
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That should include the financial industries and mortgage brokers that made a ton of money on "yield spread premiums" and "loan origination fees". Also, those financial gurus who packaged these loans and sold them as stocks on wall street need a lessen or two.

[samthetvcat]

PS

5. For people who were sold more house than they could afford who now face the threat of foreclosure, in an ideal world where logistics weren''t a factor it''d be nice if maybe the instead of facing foreclosure or instead of being shored up artificially by the Government with no possible end in sight, banks were able to offer people a smaller house with a smaller mortgage that WAS within a person''s means.

If the person is already at the lowest tier, then if they have to foreclose it''d be nice if the bank gets to keep the home that they lent the money out to purchase if the at least gave some of the money back that the person has already poured into the home with both absorbing depreciation (not counting situations where people could have afforded to stay in the home if not for the extra money they took out to buy flat-screen tv''s and coffee at Starbucks, etc). (?)

[samthetvcat]

pt 1

You know what would be my argument in favor not of bailouts but of restitution in equity is that the Government has really failed a lot of people and that since Governments are immune from being held accountable for negligence, there''s some contributory failures that don''t make it ALL a case of people having should have known - like there were breaches of trust too (?)

Some examples of people that were maybe in PART let down by the government in sort of descending order:

1. Bernie Madoff fraud victims - didn''t the SEC sort of drop the ball?

[samthetvcat]

pt 2

2. Predatory lender fraud victims - whose financials got altered by the developers'' marketers unbeknownst to them so that they could qualify for loans way out of their leagues

3. People in towns where entire industries got shipped overseas because of the free trade ideology, who now face rampant unemployment and extreme declines of housing values

4. Anybody who needed to buy a new house amidst the bubble that was artificially created by the same free trade ideology that resulted in interest rates being kept artificially low to avoid recession and letting China finance our debt, speculators all putting money in one of the few areas of growth, people banks and investment banks working in concert thanks to deregulation

5. etc

[spiritwalk]

If these people (and corporations) are bailed out, they should have to take a course on how to handle money; there should be restrictions placed, and someone should oversee their practices.
Posted by erlindab
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Many of them did take a course on how to handle money and therein lies the problem.
Courses on learning to protect your money are held as a community college night course for $25 and nobody takes them because they don''t tell you how to make money.
Courses on how to can make money you don''t have are held at the Holiday Inn for $2,500 and eveyone takes them because they want to make a fortune with no money down.
People don''t pay to keep what they have, they pay to get what they don''t have.

[citizenusa-2009]

Correction:

This has become a country of predators, with NO love or compassion for their fellow man. A direct result of being ruled by a dictator for 8 years, I think...I hope...

[citizenusa-2009]

For God''s sake the BANKS are in TROUBLE and THEY should KNOW BETTER, but THEY get BAILED OUT!!

The average Joe is NOT a financial wizard and if he gets in trouble, why not help him???

This has become a country of predators, with know love or compassion for their fellow man. A direct result of being ruled by a dictator for 8 years, I think...I hope...

[erlindab]

What about corporate bailouts?

Ours is a society that worships good fortune, no matter how it is gotten. Here, good fortune is described as having a lot of money, large reserves of disposable income, a wonderful house/condo, 2 cars, etc.... That is what makes the headlines, the news, the society pages, etc. You see nothing of the hard-working people who work day-to-day just to keep a roof over their heads, food in their stomachs, etc. - plain old normal people.

I feel a little bit sorry for the people who invested in purchasing a home, after saving the down-payment, and are now losing their homes because of ballooning interest. Others saw an opportunity to make money - nothing wrong with that. The problem is they got greedy. They took a ***-shot and lost. If these people (and corporations) are bailed out, they should have to take a course on how to handle money; there should be restrictions placed, and someone should oversee their practices.

[jjp735i]

"Homeowner Bailout Rewards Irresponsibility"

How about those bank bailouts? Talk about rewards.

[enriquecaliente]

The senior management teams still collecting their paychecks. The people who do the actual heavy lifting are getting laid off. These companies complain that they have the biggest corporate taxes of any company in any country. Yet these very same companies are off-shoring American jobs and collecting tax breaks for supposedly creating jobs here. I think that in this environment, any company that off-shores American jobs should be taxed the money that the governments (local and fed) lose. Further more, the off-shoring of jobs should be considered treason.

[enriquecaliente]

The senior management teams still collecting their paychecks. The people who do the actual heavy lifting are getting laid off. These companies complain that they have the biggest corporate taxes of any company in any country. Yet these very same companies are off-shoring American jobs and collecting tax breaks for supposedly creating jobs here. I think that in this environment, any company that off-shores American jobs should be taxed the money that the governments (local and fed) lose. Further more, the off-shoring of jobs should be considered treason.

[sparks224]

Let''s be a little more open minded about this.
As George W Bush said "Poor people aren%u2019t necessarily killers".