Most Home Buyers Were “Duped”

Sorry to keep on the housing topic, but there’s a lot in the news right now. Senator Schumer was on CNBC this morning saying that a majority of the subprime borrowers who are in financial trouble and facing foreclosure were “duped” into buying their homes. They just didn’t understand the loans and didn’t understand that the payment would rise to more than their income.

Were a majority “duped”?

I also thought it was interesting that Senator Schumer was so focused on the subprime mortgages. Subprime is only a small percentage of the problem.

Were a majority of the Alt-A and Prime mortgage holders who bought more house than they could afford “duped” too?

Congress is trying to pass several bailout housing packages. They’re not calling them “bailouts” because they don’t want to look like they’re saving any investors or fraudsters.

But let’s call it what it is.

So far, what they’re putting out there helps homebuilders (allows the homebuilders to write off losses against gains from four years ago) and some buyers (you would get a $7,000 tax credit if you bought a foreclosure.)

The tax credit isn’t a new concept. When housing was in the dumps in the 1970s due to high interest rates, Congress also gave a tax credit.

They’re also hoping to spend more money on credit counseling (a noble thing) and are going to try and funnel some money to the states to buy up foreclosures so that some neighborhoods don’t become blighted.

None of these proposals has actually been passed and nothing has been put before the President for his signatuare yet. Aka: a lot will change with these proposals.

More far-reaching are the proposals that would actually allow the banks to write down a portion of the mortgage to “market rate” so that the homeowner can refinance into something manageable.

Basically, the homeowner paid $500,000 for the house two years ago. The original loan was a teaser that made the payments “affordable.” Two years later, the payments are 30% higher and the homeowner can’t afford it. But the homeowner can no longer re-finance because the house has dropped in value to $375,000. Oh, and the homeowner put no money down originally.

What the proposal would do is strip away the $125,000 the homeowner is underwater and allow him to refinance based on the $375,000.

All of this would be financed (aka “backed”) by you and I, the taxpayers.

Now who’s being “duped”?