Bring Back Paternalism in the Mortgage Market

Not Responsible — Tom Jones

Now let me ask you something:
Have you ever felt that you weren’t responsible for the things that you do?

I do not like government paternalism. When Ronald Reagan came to power and began our 25 year experiment with government deregulation, I thought it was a good idea. It used to really annoy me when I would see paternalistic politicians who believed they knew what was good for me and for society, and that their ideas of right and wrong should be legislated. Government intrusions into the lives of citizens should be kept to a minimum, and citizens should have the right to make their own decisions and live with the consequences.

Well, maybe not.

I used to believe all of that, but based on what I have witnessed during The Great Housing Bubble, I see good reasons to bring back a little government paternalism.

First, people are not willing to accept the consequences of their actions. People want the right to do what they want and obtain the benefits of their decisions when things go well, but as soon as things go badly, they want the government to bail them out. This goes for individuals, organizations, and entire industries. I have yet to see anyone step forward and say, “I screwed up, and I don’t think the government should do anything about it.” If gains are privatized and losses are collectivized, then there needs to be a paternalistic government regulator looking out for the collective interest. This means regulation and unpopular restrictions of the choices of individuals and organizations.

Second, even if people were willing to accept the consequences of their actions, sometimes these consequences have impacts on others who had nothing to do with the original decision. If every homedebtor accepted foreclosure, and if every lender accepted the losses without pleading for a government bailout, the economic consequences of their foolishness would still have enormous impacts on all of us who did not participate in the transaction. When people accepting responsibility for their actions still causes excessive collateral damage, then the activity should be regulated to save the rest of us.

Day after day on this blog, I profile properties where the borrowers have spent themselves out of their homes. There is a fascinating, “train wreck” quality to these stories. There are lessons to be learned about managing personal finances in general and mortgage debt in particular. However, most people will not learn these lessons. If given the chance, people will abuse their HELOCs, and lenders will extend the credit to people to allow them to do so. Without restrictions on mortgage equity withdrawal, people will spend their houses and lose their homes.

This conclusion is inescapable. The hundreds of properties I have profiled have clearly demonstrated this phenomenon is not isolated. The hundreds of thousands of foreclosures caused by refinancing and HELOC abuse are a testament to the depth and scope of the problem. If we do not change the system, we will see a repeat of this problem.

Some people are spenders, and some are savers. No amount of education is going to change that. Many of the outrageously pretentious spenders obsessed with conspicuous consumption are not going away. As I pointed out in Southern California’s Cultural Pathology, we have many spenders in our midst. These people will spend and spend until their creditors cut them off. Many are dealing with the painful reality of credit contraction right now. If these people were suffering in isolation and not asking for government handouts, I would be inclined to leave the system alone; however, these people are not suffering alone, and they are begging for the government to give them some of my money to support their foolish ways. This is where I draw a line.


Regulating mortgage equity withdrawal would not be a difficult endeavor. The only problem would be the resistance from individuals who want to spend this money and from the lenders who want this business. That will be some significant resistance. It would take something like a million foreclosures and an economic catastrophe similar to the Great Depression caused by this behavior to provide the political will to make this happen. Well… it looks like the political will might be there.

I would ban all forms of cash-out refinancing except for reverse mortgages and home improvement projects with certain restrictions.

There is no good reason for people to increase their mortgages to fuel consumer spending. Anyone who makes this argument because of the economic benefit of mortgage equity withdrawal obviously has not been paying attention to the fallout of The Great Housing Bubble.

Many will argue that cash-out refinancing to fund businesses is a good thing. Tell that to all the failed business owners who are also losing their houses. I believe it is much better to encourage new business start-ups to find capital from other sources. This will prevent a great many dreamers who do not have a viable business plan from doing something stupid that costs them their family home.

I don’t have an opinion about reverse mortgages. I do see where retirees whose home equity is their primary savings would want a method of accessing this savings. Given the power of the AARP, banning reverse mortgages is probably politically untenable. Perhaps we have to wait until the baby boomers get evicted in large numbers due to these loans before they will be reformed.

Anyone who builds their own house has gone to the bank for a construction loan. These loans require the borrower to provide receipts and other proof of construction progress before the bank will release the funds. There is no reason that HELOCs for home improvement cannot be done the same way. This ensures that the money is only loaned for property improvements. I would also limit this to 50% to 75% of the actual cost. Home improvement projects do not add value on a dollar for dollar basis despite the BS you see on HGTV.

Short of an outright ban on mortgage equity withdrawal — which I think is necessary to really solve the problem — I would propose limiting the home mortgage interest deduction to purchase money mortgages plus approved home improvement projects. If people did not get a tax break by adding to their mortgage, they might be much less likely to do so. If they want the HMID on a HELOC, they would need to go through the construction loan process as outlined above. Years ago, Congress eliminated the deduction for interest on credit card debt. When the lending industry created HELOCs and allowed people to consolidate debts, they effectively eliminated the prohibition on deducting credit card interest. Basically, with HELOCs, all interest can be deducted through loan consolidation. This must stop.

As a society, we have created a system that strongly encourages a borrow-and-spend mentality. Saving in all its forms are punished while borrowing is strongly subsidized and encouraged. The credit orgy of the 00s saw this system taken to its ultimate extreme. The result was a vicious credit crunch, a collapse in asset values, and an economic downturn second in severity only to the Great Depression. Obviously, something needs to change. A little paternalism in the mortgage market is one of a number of necessary regulatory reforms, and despite the idealism of my youth, I now support these reforms.


Today’s featured property was purchased in 1991. The owner is losing the home in a short sale. Any ideas how that might have happened?

21 Woodland Dr kitchen

Asking Price: $524,999IrvineRenter

Income Requirement: $131,250

Downpayment Needed: $105,000

Monthly Equity Burn: $4,375

Purchase Price: $241,000

Purchase Date: 5/23/1991

Address: 21 Woodland Drive, Irvine, CA 92604

Beds: 3
Baths: 3
Sq. Ft.: 1,655
$/Sq. Ft.: $317
Lot Size: 2,309

Sq. Ft.

Property Type: Single Family Residence
Style: Other
Year Built: 1976
Stories: 2
Area: Woodbridge
County: Orange
MLS#: S558050
Source: SoCalMLS
Status: Active
On Redfin: 13 days

Beautiful clean 3 bedroom 2 1/2 bath 2 story townhouse in Woodbridge
shows great. new sliding glass doors, new roll down garage door, new
flooring downstairs living room. Sila stone countertops in Kitchen and
2 bathrooms very, very nicely landscaped in private large backyard
central air cupboards and shelves in garage

central air cupboards and shelves? Does cabinetry benefit from central air?

That $1 discount from the $525,000 asking price makes it seem so much less expensive, right?

This property was purchased on 5/23/1991 for $241,000. Fast forward 18 years, and the property is being offered for sale at more than double the price, and it is a short sale. This would not have happened if this owner had not been permitted to borrow against his home equity. This is a short-sale/foreclosure that could have been avoided if regulations were in place to prevent rampant mortgage equity withdrawal. This owner would have $250,000 or more waiting for him at a closing table. Instead he is going to walk away empty handed and get a demerit on his credit report.

Should this owner be prevented from borrowing and spending his way out of his home? Yes, if that behavior costs me and you money in tax relief and economic weakness.

Of course, it is easy to see this disaster now. As prices are going up and everyone has this free money that simply needs to be “liberated” and lenders are anxious to provide this money, there is enormous pressure to provide an outlet. Regulators have difficulty containing this pressure when both parties to the transaction want it to happen. It is only when the collective sees that they are a silent participant in this transaction providing insurance coverage for any losses that regulators are given the power to stop the practice.

In my opinion, we must regulate out of existence many of the bad lending practices we saw during the bubble. If we are all now parties to the transaction providing loss protection we have the right to stop the foolishness. In fact, if we do not stop it, then we are foolish, and then we deserve to pay for the future losses this behavior will produce.

BTW, I am quoted in the Wall Street Journal Today: Realtors’ Former Top Economist
Says Don’t Blame the Messenger
: “Lawrence Roberts, author of “The Great Housing Bubble,” says the
Securities and Exchange Commission should regulate NAR the way it
regulates financial advisers. “Realtors are currently able to make any
statement they wish regarding the investment potential of real estate,
no matter how ridiculous,” he says.”


Now let me ask you something:
Have you ever felt that you weren’t responsible for the things that you do?
When the girl that you are with is just too much
She is so out of sight, baby, that all you can say is:
Well, all right!

I’m not responsible, not responsible
For anything I do when I’m with you
I’m not responsible, it’s impossible
To be so very near and not feel part of you
You’ve got such a hold on me
You make it seem so easy, but it’s true, oh yeah
I get such a happy feeling
Knowing that you feel the same way too

Whoa..oa, baby, all right

I’m not responsible, not responsible
When you can make a man do what you want him to
I’m not responsible, it’s impossible
To be so very near and not know what to do
You got such a hold on me
You make it seem so easy but it’s true, oh yeah
I get such a happy feeling
Knowing that you feel the same way too
I get such a happy feeling
Knowing that you feel the same way too
Believe me baby, etc….

Not Responsible — Tom Jones

87 thoughts on “Bring Back Paternalism in the Mortgage Market

  1. JoeSez

    Bankruptcy works. People got into trouble but the professionals went along with them giving away money to people who had no way to afford the debt. The lending system went into overdrive and the whole mess snowballed.

    We got to a point where the high paid morons who gave away the money were Too Big To Fail so we had to bail them out at the top.

    Large institutions loaned money recklessly. They did this with unrealistic expectations the inflated assets securing the loans would cover the debt.

    Regulate the morons who gave the money away and went to the government with arguments they were Too Big To Fail. If they’re too big to fail, they have to be broken up into parts that are fallible. Them let bankruptcy laws deal with the consequences of bad management and bad personal planning.

    1. Walter

      I could not agree more. Let the FDIC make the bank depositors whole (this is the one place I support the tax payer getting involved at times), but let the institutions that have made horrible decisions suffer the consequences.

      Otherwise they just set up shop and do it again as soon as the market lets them.

      1. QueenCityEddie

        I would rather not see the FDIC make depositors entirely whole without limits. If the credit system needs more risk discipline then it is worthwhile to force some discipline into the source of all the activity: deposits. It will probably take some time, but I would like to see the FDIC offer tiered coverage. Banks that meet such and such criteria can have $100K of insurance, others that meet more stringent can have $250K, etc.

        1. BH in HB

          I never thought of this but, it is a great idea. Tiered coverage provides the customer choices of where to put their money based on the riskiness of their business.

        2. JoeSez

          FEDS FDIC is a promise for 100 insurance and it’s a legal obligation to honor deposits in the insured accounts to 100%. Not doing so is grossly irresponsible and illegal. it also punishes the wrong people.

          If the FEDS don’t insure deposits as promised then the FEDs can’t assure all that 2 trillion in IUOs we have sold as the national debt are honored and we’d have a total collapse of the economy.

          These investment derivatives based on mortgage assets are NOT insured. Most of the unregulated bubble nonsense was based on Big Name Firms selling uninsured products which were not regulated. Bankruptcy wouldn’t honor those assets.

          Why punish skeptical people who saved in low yield insured accounts? You’d be lumping the responsible with the irresponsible risk takers.

  2. Mark

    I don’t have problems with regulating issuance of HELOCs but disagree with regulating their use. I think your proposal punishes the responsible in an effort to save the irresponsible from themselves.

    I’ve had my home, and a HELOC, for 25 years. Total debt is less than 30% of the property’s value. I have never tapped the HELOC to its max and paid down principal regularly. It has been a godsend when I needed large sums for special purchases ex. tuition, my son’s oboe etc. especially because my income fluctuates.

    HELOCs can be regulated in other ways. For example, limiting them to < 80% of assessed value AND < 31% of PROVEN income. One could legislate the frequency with which HELOC financing could be obtained, say no more often than every 5 years, or legally prohibit using a HELOC or second mortgage to pay off a HELOC.

    1. IrvineRenter

      “I think your proposal punishes the responsible in an effort to save the irresponsible from themselves.”

      All paternalistic government regulation has this problem. That is why people do not like it. Unfortunately, the responsible are being punished by the behavior of the irresponsible through bailouts, subsidies, and a ruined economy. If we as a society are going to pick the way we are to be punished by the irresponsible, I believe we are better off with HELOC restrictions (a minor inconvenience) than by what we are facing now (a major economic cataclysm).

      1. SoOCOwner

        As one of the ‘responsible’ people, I’d like to agree with Mark, but after all I’ve read on this blog (and others) in the past year, I question the balance of ‘responsible’ to ‘irresponsible’ folks in our society. I honestly thought that most people were not foolish enough to risk their home by taking out HELOCS to finance toys and business ventures. At first, I thought “no big deal, I’m not affected by this”, but when home prices started plummenting and the stock market started tanking, I realized that we are ALL being affected by these irresponsible people. The responsible will have to pay the price for all the idiots, unfortunately.

        1. Chuck Ponzi

          Why not just tax it as income?

          Make people pay income tax on it like it were self-employed income and see how many people would be willing to extract it.

          Re-assessing property taxes at the same time would make sense. If the property is really worth that much, why not let the owner pay what it’s really worth.

          You kill 2 birds with one stone:

          1. people are disincentivized from extracting excess equity, making household balance sheets stronger.
          2. Ensure people do not get ill-gotten gains without paying the federal government. My taxes are paid at the office, why aren’t theirs?

      2. JoeSez

        The big guys screwed up so clamp down on the little guy?

        Regulation, like all laws, is a compromise.

        There’s a wide range of ways to implement and enforce policy.

        Enforcement was lax and IMHO criminal at times. This was a top down driven bubble. Greenspan was wrong.

        The recent bubble was fueled by deregulation of lending, practices and the oversight of money making products sold to investors.

        Borrowing 100% and aggressive assets inflation by LENDERS were bad lending practices. That was the problem.

        Clamping down on HELOC and borrowers absolves the lenders who are responsible for initiating the loans. It’s a heavy handed approach.

        A lighter solution is to return to traditional lending practices and forgo the Voodoo economics of free mareket delf regulation.

    2. maliburenter

      80% of 2006 prices = 130% of late 2008 prices in a lot of areas.

      You sound like someone who has been responsible with your credit line. I’ll bet you also looked at the HELOC as another form of debt. Far too many people thought of it as “home equity withdrawal”. It’s not. It’s a bigger loan.

  3. granite

    Congratulations on the excellent quote in the WSJ. It was the only part of the article that didn’t make me want to hurl, except this.

    “Mr. Lereah now works at home, trying to rebuild his career and saddled with a sagging portfolio of real-estate investments.”

    There is a good analogy of the Great Housing Bubble to the Dust Bowl Years. Congress ignored it until, during a speech by the Secretary of Agriculture, the dust storm arrived in Washington DC. The result was the world’s first Soil Conservation Service, a government program so effective no one argued it was a waste of money.

    Will Congress get it right this time? Maybe they should listen to IR.

  4. djd

    Perhaps we have to wait until the baby boomers get evicted in large numbers due to [reverse mortgages] before they will be reformed.

    I saw a TV commercial recently for a reverse mortgage which promised monthly payments to the holder for “as long as [they] live in the home” (quote from memory, may not be exact). Perhaps they mentioned balance caps somewhere in the screenfull of fine print they showed for about a second. Once I would have thought that there was no way a borrower wouldn’t understand the basic structure of their loan – now I know better.

    Would there normally be anyone involved in the transaction who would be required to act in the applicant’s interest?

    1. Walter

      How about we make the reverse mortgage companies pay until the owner dies, then the house can be sold if needed. This will make people think twice before writing these loans. It will be along the lines of an annuity paid for with equity. This way no one loses their house, and it encourages owners to build up enough equity to have the annuity make sense.

  5. george8

    These 30 plus year old Woodbridge houses are still asking $300-$450/sf which are 25-30% too high. Today’s featured home should be affordable to an average family with medium income. It should sell at or near $365k instead with the current income level of $91k.

    1. tlc8386

      I can see paying more for a house if it has kept up with improvements problem is so few have. When was the last time you saw a house actually being painted or the roof being cleaned? Considering this is Irvine I am really surprise at the lack of upkeep. So what did these people do with the money? With so many HOA’s I like to know what do they do with their money? Very little enforcement that I can see. So many properties don’t even have new mulch or dead trees taken out and replaced. When you have lived in other states coming here is nothing special. Everyone is so overpaying for nothing.

  6. scott

    I think to be proscriptive on use is going a bit far, though I think having mandated underwriting standards – eg max LTV say 90% at purchase and 85% on refi/2nds, max DTI on verifiable income, no Option Arm – would have mitigated many of the worst excesses. If we have zoning regulations that say you and I can’t build too close to the property line, like many towns do, it seems you can extend this logic to saying you can’t have a time bomb mortgage on your house.

    We need to fix the tax issues as well. Normally you would have tax incentives to provide something that you want more of – for example, alternative energy. We don’t have a problem with too little housing in the country, maybe we did after WWII when I believe the code was changed to allow this deduction. Politically of course that will never happen though maybe what we can do is limited the mortgage to 80% of your purchase price, or the FNMA conforming limit, whichever is less…lets people get into the American Dream but doesn’t subsidize McMansions.

    1. Kelja

      We don’t need more regulation & gov interference.
      I don’t need another Daddy or Mommy.

      Scott, you’re right on with having reasonable standards and qualifications apply. (They should have all along.) It’s simple and you don’t need a huge bureaucracy to take care of oversight.

      Will never happen as there are too many hands in the pie.

      1. IrvineRenter

        We used to have reasonable standards with mortgage lending. Without regulation and oversight, these standards get loosened until they are no longer reasonable and we build a massive real estate bubble. If the private sector had shown any amount of reasonable restraint perhaps we would not need regulation and government interference. Unfortunately, the private sector did not show this restraint, so they will end up getting regulated — as they should.

        1. formerbanker

          IR, there was interagency regulatory guidance (meaning it applied to banks regulated by thrifts, FRB, and OCC) issued in late 2006 that basically said ‘goodbye’ to stated income loans. The guidance was originally introduced in 2005 by regulators but due to the significant volume of comments it took quite a while for it to get finalized. “Guidance” is not the same as regulation, but banks not complying will have problems with their regulators. The banks knew it was coming down the pipe but then again, bank subsidiaries are not the primary originators of loans – nonbanks are, and thus very little regulatory oversight compared to banks. As I’ve posted before several months ago, there was zero political support to push through guidance much before that – think about it, no banks had losses…they had fantastic earnings and the shareholders were happy (in fact, shareholders dumping stocks of banks that were growing at a controlled rate was pretty common) and every politician thought that the more of its constituents ‘achieving the American dream’ of home ownership, the better. Bottom line – no need to ban MEW in my humble opinion. But require full documentation on mortgage loans and HELOC’s to demonstrate repayment ability at a reasonable DTI and some actual credit history. And make it apply to all nonbank home mortgage lenders. It really wouldn’t be that hard. It worked for the first 20 years of HELOC lending…

          1. tlc8386

            The problem with Heloc borrowing is that you are taking money out of something that it’s value is not stable thus you are borrowing money that is not there. And your right to walk away is very evident in numbers.
            I feel a loan is a loan and no matter what kind it is you have to pay it back. Why should I get stuck with your debt? These helco’s should be treated as loans not based on equity in a home.

          2. JoeSez


            We know how to lend money responsibly. Like any bubble, people thought the rules had changed.

    2. mav

      The limit for margin borrowing for stocks is typically 50%. It can be lower if there is greater risk in an equity.

      I think the standard should be 50% LTV max for any cash out refi. If the neighborhood is less desirable that limit should be lower. In addition any cash out refi should be taxed as income regardless of use.

      1. Walter

        I totally agree moving closer to the way margin is handled makes a lot of sense. At the core, we are talking about the same thing. But can you imagine getting a HELOC call? Nasty!

        Basing decisions on neighborhood would most likely be illegal based on redlining laws that I think should stand.

        I don’t think you should count the loan as income(this would end up being double taxation), but you should not be able to take the write off unless it was part of a verified property upgrade.

  7. Lee in Irvine

    the Securities and Exchange Commission should regulate NAR the way it regulates financial advisers

    I totally agree! To think that a latte drinking bimbo, is allowed to offer bold investment advice on a piece of vastly overpriced real estate, with no recourse, makes me sick.

    I hold both a series 6 and 63 securities license, and I can’t say anything remotely close to what the members of the NAR say. Their entire industry needs to be reformed.

    1. maliburenter

      I am in a similar situation. I am amazed that not only can realtors just make up anything they like about past performance or expected future returns, they also do not have a know your customer requirement.

      While it would be difficult to get real estate regulation away from the states, it wouldn’t be as difficult to either expand the Uniform Securities Act to include real estate, or to come up with a rather similar act for real estate.

      “SECTION 501. GENERAL FRAUD. It is unlawful for a person, in connection with the offer, sale, or purchase of a security, directly or indirectly:

      (1) to employ a device, scheme, or artifice to defraud;

      (2) to make an untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it is made, not misleading; or

      (3) to engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person.”

      Just substitute terms like “real estate” and “mortgage” for “security” and you are 90% of the way there.

  8. awgee

    “They who would give up an essential liberty for temporary security, deserve neither liberty or security”

    Benjamin Franklin

    1. mav

      “If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”

      Thomas Jefferson
      Letter 1802 to Secretary of the Treasury

      damn, our founding fathers were crazy smart

  9. awgee

    “I believe that liberty is the only genuinely valuable thing that men have invented, at least in the field of government, in a thousand years. I believe that it is better to be free than to be not free, even when the former is dangerous and the latter safe. I believe that the finest qualities of man can flourish only in free air – that progress made under the shadow of the policeman’s club is false progress, and of no permanent value. I believe that any man who takes the liberty of another into his keeping is bound to become a tyrant, and that any man who yields up his liberty, in however slight the measure, is bound to become a slave.”

    H. L. Mencken

    “The average man does not want to be free. He simply wants to be safe.”

    H. L. Mencken

  10. DML

    Just one point I want to make before we all feel so superior. All that money went someplace – no one borrowed it to save it in their mattress. They bought stuff that got manufactured, delivered, installed, cooked, served, resulted in sales tax, etc. So if you think you have not benefited in some way, you are wrong – even if it was only that the sales tax collected made your municipality not have to raise your taxes in the last 10 years.

    Do I hate the bailouts? Sure. But I realize that I already got something out of the HELOC abuse even though I did not participate.

    1. mav

      This is true, we all likely saw a bump in our income and bonus’ but this pales in comparison to the negatives of the asset bubble….the goods purchased in general did not lead to sustained value creation (they were goods that people did not really need to purchase, these consumer goods do not create value long term)… in addition the credit bubble created huge inflation this past decade. You would not see this in the CPI numbers but the commodity bubble pales in comparison to any salary benefit we experienced during the asset bubble.

      Furthermore, now we must deal with the over supply of everything that was created unnecessarily during the credit bubble…. from toasters, to cars, to homes…. this over supply combined with debt deflation demand destruction leads to a longer downturn.

      1. DML

        I understand what you are saying, but full employment does rely to some extent on the manufacture and distribution of consumer goods. We can’t all be doctors and lawyers, or working on the railroad.

    2. maliburenter

      Yes, but I also looked at homes and cars that were more expensive because of the credit bubble.

      There were some positives, but on net the effects were horrible for the US.

      I made a lot of money working at a financial institution, I didn’t buy a house, and I saved a lot of money. I was careful, and I lucked out.

      1. mav

        there are many people who “lucked out”… each bubble this decade (and there were many) created huge wealth disparity, and ultimately will fuel the next bubble… I benefited from every bubble this decade with the exception of the housing bubble, that is my only regret…. If you don’t participate and benefit from the mega bubbles your wealth gets siphoned off… Thomas Jefferson was a smart man.

    3. Don sheridan

      DML: Your post on Irvine Housing Blog is spot on!
      We are all to blame in the meltdown, crisis, whatever you want to call it. Thanks for reminding us that “we have met the enemy and he are us…”

    4. RichW

      I must disagree with your contention regarding the net benefits to society from HELOC-based consumption. Given that those who did not borrow are now fully compensating the banks for the losses they incur on loans not repaid in full, this more than negates the partial positive benefits you claim (such as locally spent money supporting local economies and local taxes – which is only a small fraction of the total amount spent).

      Think again about your claim – that a wastrel who borrows and spends from a bank, and is unable to repay a loan, has actually somehow done the rest of us a service and we have all shared in this.

      This is not the case, by any measure, as I have argued.

  11. Transplant

    I’ve said it before, but if we returned to the days when HELOCs and seconds could only be used for improvements on the house, a lot of the mess could have been mitigated. Its one thing to pull out equity and improve the house, presumably increasing the value of the property, its another thing to use it to “pimp my ride”.

  12. Kirk

    IrvineRenter, it’s not your money we’re telling the government to give us. It’s our money. I want every cent of taxes I ever paid the government, because I need that money now. If the government was of any use it would have invested and grown my money. I better get my money back with interest. I think a 15% APY is fair. I would have made at least that much if they hadn’t of taken my money from me.

    If government had stayed out of housing the prices would never have fallen. Instead, liberals forced the banks to lend to people that couldn’t afford houses and took away the private citizen’s right to protect their neighborhoods with sensible property covenants. It is these peoples’ sense of entitlement and the government intrusion into private affairs that has so crippled our economy and will be remembered as Obama’s legacy.

    The first thing I’ll do when I get my money back from the government is to invest it into as many houses as I can buy. With many people like me doing the same thing house prices will recover and sophisticated investors like me will recover our losses and become millionaires. We deserve it for investing our money in America and saving this great nation from the clutches of Islamic communism.

    1. Fnord

      “Instead, liberals forced the banks to lend to people that couldn’t afford houses”

      My understanding is that the government stood aside while this happened because isn’t making homes avaiable to poor (fiscally irresponsible people) a good thing? Doesn’t everyone dream of a home? What could be bad about a home ownership society where people aren’t throwing away their money on rent?

    2. AlixKhan11

      “liberals forced the banks to lend to people that couldn’t afford houses”

      Ok you lost all credibility right there.

      It was the whole free-market-at-all-cost loving conservatices (both in the media and in my own family) that were praising the ever increasing house ownership as proof that market will come up with “innovative” products to help people with home ownership and the govt should stay out of it.

      Liberals forcing banks is nothing more than a pathetic attempt by the free-market-at-all-cost lovers who now look dazed with the unfolding crisis and need an excuse to blame the mess on someone

  13. nefron

    And today’s analysis just ends up back at my mantra. Our government has been encouraging reckless spending because that’s the only thing that has kept our economy going. Why? Because we have lost our manufacturing base. That’s why I keep saying, we must support our manufacturing companies that still remain in the U.S. by buying U.S. made products whenever we can. It supports jobs here, it increases tax revenues for local and state government. Of course, true to today’s analysis, without responsible stewardship of the company (i.e., company officers not sucking every last penny of profit out for their own personal gain), even that plan won’t last long. I like it that our president-elect keeps harping on that personal responsibility theme.

  14. billinnj

    From IR’s post a couple days back, the issue with HELOC is not that they are evil as such, what creates the problem is that they enable you to monetize bubble equity, not repayment equity or inflation equity, the latter two of which are more sustainable/stable.

    HELOC abuse is a effect of the bubble but not a cause of the bubble. The cause is that the marginal buyer in the market got bubble financing to buy at a bubble price. Had we kept reasonable underwriting standards in place, we’d have not seen bubble equity develop, HELOC would have been restricted to more reasonable levels and the losses/foreclosures would be of more usual type (eg lost job, etc.).

    1. maliburenter

      Oh, but HELOCs were a cause of the bubble. One of the uses of HELOC money was to buy a second (or third, or fourth) home.

      Even when HELOCs weren’t used for real estate, they contributed to the general asset and consumption bubble. They probably helped keep car prices up. They definitely kept the volume up.

      1. IrvineRenter

        I would further argue that knowing you could get the free money of appreciation to spend as income made houses even more desirable which did contribute to the bubble. Even if house prices had been going up by huge amounts, if people could not access this money, houses would have been less desirable.

        1. billinnj

          Thanks for the reply.

          On HECL buying second homes, again I’d argue that it was lax standards ie another variation of 100% LTV and no DTI check. Pre-bubble only higher income borrowers or people with heaps of equity would qualify.

          I don’t disagree with IR but see that as an effect of the bubble. Also, and I need to read your Southern California Pathology post, is that seems to be largely a CA issue (with some Vegas/FL coast). Maybe the answer is just to ban the use of HELOC in California?

          BTW IR had referred a fried who was looking to buy about a year ago here, he read up and decided to defer his purchase, and he is very very happy with that decision. Add my compliments to the great work you have done.

    2. Nick

      This is an interesting point. One I should have addressed in my (severely flawed) post below.

      There is a big difference between paid-in equity and appreciation equity.

      Allowing people to borrow or cash out up to 80% of the appraised value at the time the first mortgage was written (or perhaps the original principal amount of the first mortgage) would preserve people’s incentive to pay down their mortgage, while still addressing the insane spiral of constant withdrawal of nonexistant equity.

      Sure, in a rapidly falling market that rule would still put people at risk of being underwater. But rapidly falling markets can by definition make anyone underwater if they don’t own the property outright. At least that preserves actual liquidity while preventing

  15. irvinemommy

    FYI: Today on NPR at 1:00 they will have an interview with a former executive (I am not sure what rank) at Countrywide.

  16. EdTheRed

    In addition to allowing cash-out loans for home improvements in certain circumstances, I’d include allowing it to pay off student loans in certain circumstances. Since unsubsidized student loans are unsecured, they often end up with terms that are less favorable to the borrower than terms of secured loans. Allowing a homeowner with equity available to convert unsecured debt into secured debt isn’t a bad thing for either borrower or lender, and it doesn’t actually increase the borrower’s level of debt.

  17. Nick

    I’m surprised you haven’t made a comment about the intermediate step that would be obvious here.

    You propose that the government essentially ban HELOC’s, or make them much more restrictive.

    But you oddly don’t note that currently the government SUBSIDIZES them heavily. Seems like if you’re going to start somewhere that would be the obvious place, no?

    I don’t really see what difference it makes to tinker around with HELOC laws when unsecured debt is so incredibly widely available. I have something like 200k in available credit on my credit cards. Granted I have a good history, but if you’re ignoring that I’m not sure you’re really addressing the wider problem of consumer debt in general.

    But back to my point. Right now the government PAYS people to take out HELOCs. The interest deduction is effectively the same thing as a subsidy. One of the reasons people favor HELOC’s over credit card or personal loan debt is for precisely that reason. And after the tightening of bankruptcy laws the line between secured and unsecured debt is far more blurry than it used to be.

    Myself I’m not remotely opposed to government “paternalism” (read: regulation) of consumer markets. But I’m not sure you’ve thought this one through. You have to consider the incentive structure you’ve created. A perverse side effect would be to create a disincentive to pay down mortgages.

    For example, I have a second home with a mortgage. I’m aggressively trying to pay off the mortgage faster than the amortization schedule, as I would feel more comfortable with a lower balance, it saves me interest, and it makes me more solvent. One of these days I intend to buy a primary home (I rent now — it’s NYC, it’s complicated) and the more I’ve paid off the stronger my financial situation will be on paper, which matters in NYC for co-op boards and the like.

    But one of the calculations is that I do have equity and I do theoretically have access to that equity without selling. If I found myself in a position where I wanted to re-borrow some of that money (to finance a child’s education or serious medical care, whatever) I could via a HELOC or cashout refinance. If I knew this was mostly irrevocable I would be much less inclined to pay down my mortgage as aggressively. Which is not an incentive you want to create.

    I think the problem might be better addressed by limiting the mortgage interest deduction on HELOC’s. That would remove some incentives to borrow against real estate versus basic unsecured loans or credit cards. The deduction is supposedly designed to promote home ownership by subsidizing residential real estate borrowing, so why are we letting it be used to subsidize borrowing for consumer spending?

    Right now it’s far more logical to take out a HELOC to buy a car, say, than take out a car loan. Why? Because the government subsidizes the former and not the latter. Why not start there and stop that subsidy?

    Then you could look at another provision where you remove the interest deduction for any portion of a loan over 80% of equity that involves a cash-out. You could preserve it for initial purchases of course to help first time buyers get started with more modest down payments.

    Anyways, that’s a bunch of different thoughts — but it seems like the first thing to do is address the way things are now, which is totally illogical. You are rightly concerned about this issue — but we have the government actively subsidizing it. That’s sort of crazy. You don’t have to get draconian, at least not right away. You could at least get rid of this senseless policy that stands now, with far fewer complications.

    1. Nick

      Dammit, I’m a complete moron. I somehow missed that you did address that. I wish you could edit posts here.

      Oh well.

      Anyways, nevermind on most of my post then.

      Though I do think you should be aware of the incentive structure you’re advocating. You say:

      “Without restrictions on mortgage equity withdrawal, people will spend their houses and lose their homes.”

      That’s certainly true. Though some people are going to f-ck up the program no matter what you restrict.

      But do consider the converse, which loosely is:

      “With restrictions on mortgage equity withdrawal, people will have a strong disincentive to pay down mortgages more rapidly and put down as little as possible, to preserve liquidity”

      That’s not necessarily a good thing either.

  18. OC Zed

    And if we allow this paternalism, then where does it end? And who is to say that our government leaders are qualified to make these decisions? I find it funny we want to vest these regulating powers in the hands of people that cannot even provide a balanced budget on a consistent basis.

    We could instead limit the coupling effects between the responsible and irresponsible by simply cutting off the bailouts and letting the irresponsible actors suffer the consequences. This is a much more efficient way than having Big Brother continue to make decisions “for our own good.”

    1. maliburenter

      This paternalism is in exchange for govt guarantees to depositors at FDIC institutions. For many other institutions, it is in exchange for other federal help.

      We don’t want to be back in this position in another 10 years. We can just say no to irresponsibly providing credit.

      We can also get rid of certain tax deductions. Like IR says, getting rid of the mortgage interest deduction on cashout refis and HELOCs not used for some improvement would reduce the irresponsible borrowing.

      1. OC Zed

        The FDIC is an independent government agency funded by premiums from its member banks and is not really a good example to use for this.

        I agree that we do not want to go through with this credit meltdown all over again. I think, however, that the combination of (i) people feeling the true repercussions of their risky behavior, and (ii) eliminating or significantly reducing the existing government distortions in the market (eliminating the GSEs, all mortgage interest tax deduction, etc.) would be a much more efficient and fair way to provide assurance that we do not see a similar bubble in the future.

        Adding more government involvement only signifies a further step in the wrong direction.

    2. Eeek

      This decoupling from irresponsible to responsible was attempted in September, 2008 to no avail.

      In an ideal (ok, maybe not ideal, but I suspect better than the current) world where aig, citi, jp, chase, behr, lehman, gs, and four or five hundred other banks were allowed to fail and 700 billion U.S. $$$ were injected into the remaining ten or eleven structurally sound banks (enough to support 8 trillion in new lending and or firesale purchases from the losers, whatever) then I could fully support your suggestion.

      Sadly, we just don’t have that luxury as demonstrated by the way this story has unfolded.

      To see just how badly our desires for such decoupling were ignored, see this

      “Senator Barbara Boxer, Democrat of California, has received nearly 17,000 e-mail messages, nearly all opposed to the bailout, her office said. More than 2,000 constituents called Ms. Boxer’s California office on Tuesday alone; just 40 favored the bailout. Her Washington office received 918 calls. Just one supported the rescue plan.”

      Congress tried to hold out (or at least, were terrified initially of the consequences of ignoring such a groundswell of negative sentiment) but with the Senate selling out and sending it back at them they collpased like a cheap house of cards and here we are today.

      As realtards say, Regulation, Regulation, Regulation

      (or was that loquation, loquation, loquation?)


  19. Perspective

    “…I have yet to see anyone step forward and say, ‘I screwed up, and I don’t think the government should do anything about it…’” I think I’ve shared this sentiment repeatedly here. I researched buying a home reading Irrational Exuberance, IHB for a few months, and other sources. I simply miscalculated the downside risk. I don’t think the government should do anything to help me, AND I’m not completely opposed to the government trying to help other homeowners. How’s that for an aberration?

    Also, as a banking attorney, I fully support MORE regulation!

    1. OC Zed

      “Also, as a banking attorney, I fully support MORE regulation!”

      Attorneys are almost always the biggest beneficiaries of more regulation.

      1. OC Zed

        I should also mention that I am a transactional (RE) attorney myself and I think a lot of what we do is meaningless CYA paper-pushing. More regulations will only exaggerate this further.

  20. Laura Louzader

    The relationship between freedom and responsibility should not be difficult to understand, yet our august leaders Do Not Get It.

    I work in a brokerage firm as a compliance officer, and like most firms, we have CNBC playing all day for the benefit (?)of our customers. That means I have to try not to listen to the brainless blather of Kudlow&Kramer;and all the people they interview.

    Well, and I am sitting here this morning listening to Hank Paulson whine about how the government should not tell the banks how to lend money? HUUH??? I mean, we are handing these institutions, all said and done including the TARP and all the previous interventions such as HOPE and the rest, north of FIVE TRILLION CLAMS, and we have no right at all to dictate how that money shall be spent?

    Freedom demands responsibility, and, conversely, if you want to be bailed out of your mistakes, then expect regulation and scrutiny. Will you hand your kid carte blanche discretion over your money and credit while absolving him of all responsibility for the 6-digit bill he runs up as a result?

    It is trendy these days to blame something some folks refer to as the “free market” for this debacle. What “free market”? The U.S. has NEVER been a free market economy, and what we’ve been calling that, is actually Crony Captilism driven by government policy in tandem with massive subsidies and props, direct and indirect, to chosen industries and players. There is not a single major economic trend of the past 100 years that was not driven by policy decisions and matching massive allocations of tax monies.

    We are in the predicament we’re in because it has ALWAYS been understood that we will always bail out the financial markets no matter how much malfeasance and insanity has taken place, while giving the major players absolute license to operate however imprudently they wish. The S&L bailout of the 80s was very instructive- it let the major players know that they could take as many insane risks as they saw fit in pursuit of the largest profit, and that the taxpayers would pck up the other side of all the bad trades. The bailout of LTC reinforced this lesson. Those bailouts helped pave the way for the mess we’re in now, which really is too big to bail.

    If we’d refused to bail out the S&Ls;in the 80s, we would have driven it home to the financial firms that they would have to carry their risks and losses themselves, and they would have behaved more prudently.

    But, instead, we continue to absorb their hits while granting them license to operate with total disregard for risk, which they are doing. IO mortgages are still being generated, and the FHA is sponsoring yet another wave of bad mortgages, right this minute, that will have to be “rescued” in a few more years.

    It won’t end until we become another Weimer Germany or Argentina, and the treasury totally collapses from the weight of the unpayable government debt, and we as a country no longer have the credit or credibility to buy what we need from abroad.

  21. autolykos

    The one reform I’d like to see is the outlawing of teaser rates. The harm these cause far, far outweighs any good.

  22. Pikkabon

    To hell with paternalism. Bring back arithmetic skills in the mass media and the populace at large.

    Pikkabon Shiatsu

  23. Anonymous

    Germany has conservative borrowing of all sorts (mortgages, govt, etc). Now their broke neighboring countires who have overwhelming debts so can’t apply stimulus, and all leaning on Germany to break the piggy bankd and supply the stimulus (ie. go into debt to save the debors). You just can’t win.

  24. Anonymous

    Humor re: ‘I have yet to see anyone step forward and say, “I screwed up, and I don’t think the government should do anything about it.“’

    Clearly, you need to know more people who have piles of unpaid parking tickets …. 😛

  25. Anonymous

    Blame the doublespeak “The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005”. Basically, before the act, lenders knew they could get screwed by deadbeat borrowers doing the bankrupcy thing and not paying them back, so the lenders were cautious not to lend people more than they could get back. However, after their ten years of lobbying paid off to get that act passed, then they could lend people more than they could repay, and still squeeze them post bankrupcy for the rest.

    Now that the wind is blowing back to old times (mortgage cramdowns anyone?), then lending pendulum will swing back to only lending what people can repay as well.

    1. irvinemommy

      There was an interview today on NPR by Pat Morrison with Adam Michaelson. Different from the one posted above. Thought that I was mistaken on the time. I got busy and missed the first half, but the last half was entertaining.

    1. tlc

      Placentia salaries: $1 million paid in 2007-08 overtime
      Wage report indicates 66 employees gross $100,000 or more in 2007-08.
      By ERIC NEFF
      Comments 0 | Recommend 1

      Nearly 21,000 hours of paid overtime was collected by 141 Placentia employees in fiscal year 2007-08, primarily as a result of inadequate staffing levels, according to city officials.

      Much of the overtime was paid to Placentia Police Deparment officers and dispatchers. The second-largest group of OT earners were Public Works employees.

      This database includes city employees whose total compensation is $50,000 or higher. Total compensation includes base pay, benefits such as standby pay and longevity pay, and overtime.

      1. Major Schadenfreude

        Placentia was having problems even before the Great Depression II started. They spent a lot of money trying to make their downtown a railway destination. Didn’t quite pan out and had the usual scoop of government malfeasance to boot:

        “Becker’s original consulting contract guaranteed him $450,000 a year for 10 years, making him one of the highest paid transportation officials in the nation. His contract was scaled back in 2003 amid controversy over his pay and OnTrac’s expenditures. Prosecutors allege that he made more than $1.3 million from the arrangement, plus city benefits as public works director.”

      2. tlc8386

        sorry to get off topic but the articles over the weekend with our budget mess is increasing and so much of this is based on over time pay–2 billion and counting and then I just read this

        it appears almost everyone is stealing from the tax payer–:(

        Someone mentioned the liberals and their getting a cheap house based on subprime lending. Well this Heloc abuse is so much worse–they may have lived in a nice home and then when the arms reset way above their means walked –but the heloc abuse is thousands upon thousands of more dollars–case in point the house last week that ONE HOME alone was 500k of helco abuses.

        Our state has been spending big time on raises and pensions beyond our wildest dreams. And all this matters HOW—our property taxes have to pay for it all.

  26. NOT


    Thank you again for your time posting here. After reading for some time, I think this is the first post that I actually disagree with.

    Restricting HELOCs to certain use would create an industry specifically targeted at circumventing rules (Example: Mrtg Broker, life insurance, etc.).

    Also, what is one to do if one needs a great deal of money for {insert health condition that needs lots of money here}?

    Are you saying that in order to take out a loan from an asset, that you would have to sell that asset?

    1. it comes in waves

      There are the good, old fashioned credit unions; use the house as collateral.

      Why not buy health insurance instead taking out a heloc?

      What do propose renters like myself do?

      1. NOT

        I have no idea. I am renter myself. I currently can not borrow from a bank for medical expenses of any sort can I? I have to “borrow” from the hospital. What are the rates there? Is borrowing for my health against my home better or worse then borrowing for my health from a Hospital?

        1. it comes in waves

          To tell you the truth, I’m not sure either.
          I only have a problem with anything that inflates home prices for reasons that are not fundamental. I believe heloc abuse has made the divide between us and homeowners much wider.

  27. sunsetbeachguy

    I don’t often post here, but I am veteran of the bubble blogs and the Lansner blog battles with Pat Veling & Gary Watts.

    Graphrix would recognize me.

    Bubble Markets Inventory Tracking is showing up as needing an invite.

    I know OCRenter bought, but how can I get an invite to see the inventory numbers?


  28. Craig

    I wouldn’t ban anything, but I wouldn’t bail anyone out either. Let those who make bad decisions live with the consequences.

    Widespread bad decision making may indeed hurt the innocent as well, but not systematically so, and not to the extent of the disastrous bailouts that are in the works.

  29. Corona Renter

    It doesn’t mean squat what you or I would do or would not do because the decision makers are the fools in Washington that accomodated the bubble in the first place. The only answer is a political solution.

    Throw the bas..ds out and elect responsible representatives from any party.

  30. Mooser

    It used to really annoy me when I would see paternalistic politicians who believed they knew what was good for me and for society, and that their ideas of right and wrong should be legislated. Government intrusions into the lives of citizens should be kept to a minimum, and citizens should have the right to make their own decisions and live with the consequences

    Shorter Irvine Renter: The entire world popped into being the day I was born! All those regulations which were based on evidence of people’s behavior in business and its consequences were all arbitrary, since none of the evicence is real, it couldn’t be, after all, I didn’t see it. And how could anything, anything I want to do not be good for everybody? It’s just not possible! It must all be commie ideology!

  31. pbriggsiam

    Does anybody want to discuss this issue from a moral/ethical perspective? The government is a reflection of the people it represents. That we have had such poor government for so long, certainly with respect to the focus of this blog post, isn’t a permanent characteristic of government being wrongly paternalistic. We get what we’ve put into it as a people.

    Apathy of civic engagement by Americans has lead to unaccountable leaders. Disinterest in learning about the issues which affect us in our communities has led to a dumbed down populace incapable of seeing through the corporate new media bias protecting our unaccountable leaders.

    Glad to see your former hostility to a paternalistic government has changed but it appears based mostly on selfish interests. It seems that when we get beyond ourselves as a motivation for our political stances and actions, at least some of the time, great things can be accomplished. It seems we ought to be less callous to our neighbors – good and bad alike.

    I would also add that the regulation, while helpful, is only a band-aid to the bigger problem. We have a society that bases its happiness on extreme materialism. That focus will always find another outlet.

  32. RichW

    I like the idea of removing all tax benefit from HELOCs or MEWs other than what can be proven via receipts, and further to only allow a tax benefit for 50% of the loan. Also, to disallow any tax benefit from cash-out refinancings to the degree the loan amount is increased.

    It is bad enough for renters to be subsidizing the tax burden of homedebtors. One could argue for the complete elimination of the home interest deduction, and make a very good case for that based on equitability for owners versus renters.

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