Do you remember those words from grade school?  The big kid from the back of the class shot a spitball at the teacher, and so everyone got the same punishment.  There were 29 kids in the class that didn’t do anything, but they still got the same treatment.  What’s worse is that the kid that caused the trouble didn’t suffer any more than the kids that didn’t.

That was simply because it was easier for the teacher to issue a blanket punishment to everyone than to figure out who the real culprit was.  Or worse, the teacher knew who it was, but didn’t want to bother to prove it… and punished everyone else.

What does this have to do with real estate?

I’ll tell you.  A few months ago we had an event (long time coming) called the Sub-Prime Mortgage Meltdown.  I call it an event because it all seemed to come together at once.. that moment when the poo-poo hit the oscillating air mover.   All of a sudden, the people buying Mortgage Backed Securities stopped.  They “noticed” that a lot of these loan packages sucked.  In some cases, they sucked because the packager wasn’t real honest about the quality of the loans they packaged together.  In other cases, they sucked because the underlying loans were going to go south unless the rates stayed freakishly low.  Even then, the teasers were so low, and attached to such volatile indexes (in some cases), that failure was imminent.
Since failure was imminent… failures began to increase.  Interest rates started to reset from the freakishly low to just low… and some to normal… and some to not that good.  Despite what is being said  on the news, the “outrageous rates” we are talking about are lower than the prime rate was a few years ago.  But, if one was stretching to make a payment at 3%, 6% is going to almost double the payment.  For the worst of the loans, interest only, they would double.  At 9%, they would triple.

As people’s rates reset to higher rates from the freakishly low teasers, some of those borrowers were unable to keep up.  Foreclosures started accelerating.  (Despite the month-to-month decrease for November, they will be up during the first part of the year again).

Borrowers utilizing these products started feeling a lot of pain.

But, borrowers that didn’t get ARMs, interest only, and other riskier products didn’t have a problem.  Instead of getting the teaser of 4.25% for a few years, and then uncertainty about where the rate was going, they picked up a 5.875% loan, fixed at that rate for 30 years.  (actual percentages and prices varied, these were used for illustrative purposes only).  That meant that they could only buy at $300k house instead of a $375k house.  They were responsible.  They didn’t make noise, because they made solid decisions.

Some of the borrowers that did choose the riskier products were, are, or will soon be hurting.  The payments that they KNEW would go up… went up.  Maybe they won’t be going up until next year.

So, in steps the federal government to “stop the pain” for those borrowers that choose poorly.  Instead of finding the bad people, and punishing them, or finding the people that were truly taken advantage of and helping them…

Everybody gets treated the same. The bad kids aren’t punished any more than the good kids.  The good kids aren’t helped any more than the bad kids.

In Part II we’ll go into why it is absolutely the wrong thing for the government to do.