Thursday, September 09, 2010

Allan Sloan tries to make a case for helping those who, in his words, have "done nothing wrong except buy a home when the housing bubble was at its peak a few years ago".

According to Sloan, these people are being 'screwed' because, having bought at the top of the market, they are now likely underwater on their mortgages and thus unable to take advantage of the low refinancing rates.

But why are they underwater? Oh, that's right, they not only bought houses at the top of the market, they took advantage of the 100% financing available at the time. Maybe Sloan sees nothing wrong with either, but to me, that's two strikes. Not that I'm holding myself out as a paragon of good choices, but I could have bought an even bigger house if I had gone the no-down payment route and I could have bought in the go-go days of 2006 and 2007, but neither was what I thought prudent.

And why should we even consider them 'screwed'? If they did nothing wrong, they should be able to handle the payments they committed to make in return for the right to live in the house they purchased. That people who have equity in their homes are able to refinance doesn't mean that the people who didn't make down payments can't refinance are screwed. They got the deal they signed up for. That they're continuing to make their payments is admirable, but not something that entitles them to victim status.

And Sloan also makes a mistake when he deems a proposal for helping these people (see Sloan's article for the specifics) as not requiring the mortgage holder to take a write-down. Au contraire, and as Sloan well knows, the amount of money the current holder of the mortgage paid was based on not just the principal portion of the mortgage (which wouldn't be written down) but also on the stated interest rate. A cramdown of the interest rate would result in the mortgage holder taking a write-down on their loan.

I'm surprised, Sloan is usually better than this.