Redefining Played By the Rules
I'm getting bailout fatigue. I don't care who get bailed out any more. Not that whether I care matters anyway. I am however very annoyed by the saying that those who are getting bailed out "played by the rules" or "acted responsibly." It's an insult to those who really played by the rules and acted responsibly.
I don't know whose rules were played by. If the rules changed, I didn't get the memo. Let's do a refresher on the rule book.
1. Don't buy unless you can afford it. If someone's income didn't change, and they were able to afford the loan at the time the loan was taken out, they can still afford the loan. Borrowing more than you can repay is not playing by the rules. Counting on refinancing is not playing by the rules. If the income changed, see rules #4 and #5.
2. Pay at least 20% down. I wonder how many troubled homeowners had 20% down. If they didn't have 20% down, they didn't play by the rules.
3. Take out a fixed rate mortgage. I wonder how many troubled homeowners have a fixed rate mortgage, versus an adjustable rate mortgage that resets higher. Gambling on interest rate is not playing by the rules or acting responsibly.
4. Save for a rainy day. Things happen. You need an emergency fund to cover such contingencies. You are supposed to have an emergency fund that covers three to six months of living expenses. That's a rule. I wonder how many troubled homeowners had an emergency fund. Living on the edge is not playing by the rules.
5. Insure your losses. You can't cover everything on your own. That's why you need insurance. If you know you won't be able to pay your mortgage if you lose your job or can't work due to injury or illness, buy insurance. It's not playing by the rules or acting responsibly if insurance is available and you don't insure losses you cannot afford to cover yourself. Because people don't always play by this rule, most states *require* by law that you have insurance if you drive a car.
Those are the rules. I wonder how many troubled homeowners really played by them. The only ones I can think of are those who paid 20% down, took a fixed rate mortgage, can still afford the payment, but are upside-down with their loan because the home's value dropped more than 20%. They are making an economic decision to exercise the built-in put option in their loan. That's fine by me. It's perfectly legal and rational. If they are willing to lose their 20% down payment and all the payments they made, so be it. I'm not sure they really need help though. By definition they can afford the payment.
Helping troubled homeowners is fine with me. But let's not pretend they played by the rules or acted responsibly. They didn't. They gambled. They lost. Let's admit we are helping gamblers. So many other less-deserving gamblers already got bailed out for more money. Helping more gamblers fits the pattern.
Unless they are talking about the new rules I haven't subscribed to.
- Buy as much house as they let you. Lie about your income. Don't worry about if you can afford it or not.
- Pay 0% down. Use your money elsewhere.
- Take an interest-only, adjustable rate mortgage with a teaser rate and negative amortization payment options.
- Live paycheck to paycheck. Max out your credit cards.
- Insurance is waste of money.
So, when they say "played by the rules" and "acted responsibly," which rules are they talking about?
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9 Comments on Redefining Played By the Rules
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simplesimon on March 5, 2009 |
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Jim on March 5, 2009 |
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Pelon on March 5, 2009 |
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JustAsking on March 6, 2009 |
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JustAsking on March 6, 2009 |
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Trevor @ Financial Nut on March 11, 2009 |
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There's a lady at work that was complaining about the possibility of certain homeowners (the responsible ones with good credit and whatnot) getting more help than those that weren't responsible. She didn't say which group she belonged in, but this lady also has 75% of her 401k in company stock (the other 25% in a stable value fund for tactical rebalancing) and also has a second house in Las Vegas which they bought a few years ago and does not rent out. Oh, and she's almost 60. Her complaint pretty much annoyed me, but I can't help but feel bad for her.
This was very well said! I agree with you 100%
There are two things that annoy me about people's reaction to the current financial situation. The first is what you've highlighted above, the second is the thought the the government is supposed to protect us from all the bad things that happen in the world.
I'm not sure I understand what you're saying about people who played by the rules. Should they get "bailed out"/"helped" or not?
It seems unfortunate that of two people living next to each other, one who played by the rules, one who didn't, one may get help, the other may not.
I followed all the rules you laid out. If my neighbor gets help, then I want it too. Better though that no one "get help": this is the market, it happens.
@Jasonian – I don't care any more whether people who didn't play by the rules are bailed out or not. I'm not getting into the debate whether it's fair or whether helping them does the greater good for the economy. All I want to say is — let's be honest — don't say they played by the rules when they clearly didn't.
tfb,
I think the idea is that a lot of people in the first category–"those who paid 20% down, took a fixed rate mortgage, can still afford the payment, but are upside-down with their loan because the home’s value dropped more than 20%"–lost their jobs and/or their savings and can't, in fact, still afford the payment. I don't think we need more social disruption caused by these people losing their homes to foreclosure. The ones who make $30k a year and were sold a $600k home, yeah, they need to move to an apartment. But I have no objection to sharing the wealth and helping the less fortunate–in good times or bad.
JA
JustAsking – I understand the job loss. They didn't follow rule #5. Mortgage insurance was widely available. They are one job loss away from not being able to afford the mortgage payment, but they still decided to self-insure and not buy mortgage insurance. It's like people who live in flood zones but don't buy flood insurance or live in earthquake zones but don't buy earthquake insurance. That's gambling on they won't lose their job or in the cases of flood insurance and earthquake insurance, there won't be flood or earthquake. I don't mind helping people who suffer from job loss, flood or earthquake. I do want to get the right message across: you gambled, you lost, here's help, next time don't gamble like that.
tfb,
From whom would they buy mortgage insurance? AIG? 
And losing their jobs would affect their ability to make the payments. The overall decline in real income over the past 30 years means that a lot of people who might have been able to afford it before are just hanging on now. But I agree with your conclusion: you gambled, you lost, here’s help, next time don’t gamble like that.
JA
Interesting points made here. I like what you say, though, about putting 20% down. It's so key! It'll save you so much money in the long run. My wife and I are on our way to saving 20%. It's not easy because we'd like a home right now, but it's worth the wait.
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