Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“You don't pay taxes - they take taxes.”     Chris Rock

February 18, 2009

Obama’s $ 75 Billion Mortgage Bailout, And Why It’s Doomed To Fail

by Doug Mataconis

Later today, President Obama will unveil his plan to help homeowners in mortgage trouble and revive the housing market:

Seeking to stabilize the foundering housing market, President Obama is offering a plan to help as many as nine million families refinance their mortgages or avoid foreclosure, according to a summary released by the White House on Wednesday morning.

The plan, which is more ambitious than expected, would spend $75 billion to help keep as many as four million families in their homes, and would help as many as five million more refinance their mortgages to take advantage of lower interest rates.

“The plan not only helps responsible homeowners on the verge of defaulting, but prevents neighborhoods and communities from being pulled over the edge too,” the White House said in a fact sheet.

(…)

The plan would allow four million to five million homeowners refinance mortgages guaranteed by the government-controlled housing giants Freddie Mac and Fannie Mae. The administration said allowing people to refinance at lower mortgage rates would reduce monthly payments and save families thousands of dollars every year.

(..)

The plan would seek to entice lenders into lowering rates, and would offer homeowners a chance to shave thousands of dollars off their mortgages. The government would offer homeowners principal reductions of $1,000 a year for five years if they stayed current on their payments, and would give $500 to loan servicers if they modified loans before borrowers fell behind in their payments.

Or, if a lender lowered interest rates so that buyers were spending 38 percent of their monthly income on mortgage payments, the government would provide matching funds to lower that payment to 31 percent of income. The White House said such a reduction could equal $400 in monthly savings on a $220,000 mortgage.

The biggest problem with this plan, it seems, is the enormous moral hazard problem it creates:

Think this through for a second. Your home value, along with all your neighbors, has gone down in the last year. But now your neighbor, who bought above his means and can’t make the payments, because of a reset to the REAL monthly cost of the loan, is suddenly going to get a gift. Well what about you? You did the right thing. . You didn’t buy more than you could afford. But you don’t get a break.

(…)

The proponents say you have to stop the decline in housing prices. Why? We get e-mails every day from frustrated savers who believe now is there time to be rewarded—with a home, or investment property they can finally afford. But the government wants to do everything to punish those people, and keep them out of the market, even though they did the right thing.

Instead, they are going to have their taxpayer money transferred to someone who made bad decisions. $1,000 for the homeowner, $1,000 for each modification. That’s $2,000 per loan of YOUR MONEY being given away.

In addition to the rightly-felt resentment that this creates among those of us who were responsible in their home-buying decisions, a plan like this that simply bails out homeowners who entered into risky loans, and the banks that let them do it, sends a signal to people — no matter how badly you screw up, the government will be there to save you and make sure you don’t suffer the consequences of your bad decisions.

Moreover, it’s fairly clear that the plan, which is aimed at keeping people in homes they can’t afford, is entirely mis-directed:

There are many reasons for foreclosures, from borrowers getting into a house than they couldn’t afford to a job loss or other factors that cause loss of a family’s income. Whatever the cause of the homeowners’ troubles, the focus should not be primarily on keeping people in their homes, but on opportunities to improve their economic situation. If the government wants to spend $75 billion to help troubled homeowners, it would be better off giving a tax holiday to families subject to foreclosure, rather than attempts to stop the foreclosure from occurring that often have unintended consequences.

While all foreclosures are difficult, they are sometimes the least bad option for an individual borrower. They allow borrowers to walk away from both the home and the loan, at a cost to their credit rating, but not nearly as big a hit as they would take if they declared a personal bankruptcy.

Having borrowers continue to pay into a bad loan, even with reduced payments, takes away money they could be using to start over. Redefault rates from existing government-backed loan modification programs indicate that they are often ineffective. And in the case of borrowers facing job losses, staying in one’s home while being saddled with a mortgage can delay the necessary step of moving to an area with more job opportunities.

Most of all, this part of the plan seems to be aimed at the idea that the government must reinflate the housing bubble so that housing prices return to the “correct” level.

Here’s a clue, though. The only “correct” price for your house is the price that someone is willing to pay for it. Today.

The fact that it may have been worth a certain number, on paper, three years ago, doesn’t mean a thing; especially considering the fact that it was clear for some time that the housing bubble was unsustainable.

Obama’s plan, while ambitious, is even more mis-directed that the stimulus plan was. I would expect the results to be similar.

Cross-Posted at Below The Beltway

TrackBack URI: http://www.thelibertypapers.org/2009/02/18/obamas-75-billion-mortgage-bailout-and-why-its-doomed-to-fail/trackback/
Read more posts from
• • •

10 Comments

  1. Are you responsible for your neighbor’s bad decisions?

    http://pacificgatepost.blogspot.com/2009/02/obama-mitigating-mortgage-foreclosures.html

    Obama and Congress appear to think so.

    Comment by James Raider — February 18, 2009 @ 11:21 am
  2. The proponents say you have to stop the decline in housing prices.

    Proponents say this because they have to keep the big lie that is the housing bubble going. Doing otherwise would mean they were wrong, and that simply isn’t possible. /sarc

    Comment by Quincy — February 18, 2009 @ 5:47 pm
  3. Estimating U.S. population at 305 million, we could each be given 24 million. Something about this 75 billion STINKS!

    Comment by Carol Swann — February 18, 2009 @ 6:18 pm
  4. Carol – Check your math: 75 billion among 305 million is only $246 each.

    I agree, this is a big waste of taxpayer money. Refinancing the mortgage will not help somebody with no job.

    What should happen: the banks should see now that housing prices have dropped drastically, and they would lose a significant portion of their investment in a forclosure. They should, therefore, voluntarily work with the homeowners in trouble to refinance the loans to where they can afford it. See, no need for government interference, and everybody comes out better.

    Comment by Peter — February 18, 2009 @ 6:56 pm
  5. [...] We cannot continue to reward people who make bad decisions and act irresponsibly by punishing people who make good decisions and act responsibly. Immoral and [...]

    Pingback by Mortgage Bailout Bill? More Money for GM? They Can’t Be Serious | Hear ItFrom.Us — February 19, 2009 @ 2:36 am
  6. [...] Some people get distracted by stuff that matters. Why the stimulus package is doomed to fail. [...]

    Pingback by Scott Adcox » Blog Archive » When Chimps Attac — February 19, 2009 @ 3:07 am
  7. Peter

    Why should a bank voluntarily work with a borrower to re-do a loan, when the gov’t will pay them a $1,000 or two to do the same thing.

    This bill sucks, just like the so-called stimulus bill. Were not getting out of this very quickly because everyone is waiting for the gov’t to help them out of their situtation. If the gov’t wouldn’t keep stepping into every situtation or keep changing the rules daily people and businesses would start figuring things out on their own without taxpayer money.

    We are setting a terrible precedent for the future with what the gov’t is doing.

    Comment by TerryP — February 19, 2009 @ 5:32 pm
  8. The banks would work with the customers if they did not have the government bailing them out. It is just another way in which the government is screwing the little guy.

    Comment by Peter — February 19, 2009 @ 8:27 pm
  9. Where is the $75 Billion coming from? Is this a part of the $780 B bill just signed or a new rip off for the country? I don’t recall this 75 B ever being discussed.
    What is going on?

    Comment by Jim Payne — February 23, 2009 @ 12:18 pm
  10. As far as I can tell, this is separate from the stimulus bill. I think this money is just going to pop out of thin air.

    It will be interesting to see what Obama says about “fiscal responsibility”. I hope he understands this spending must be offset by cuts elsewhere. Rumors that he is cutting funding from the military? I seem to remember Obama saying something about bringing people home from Iraq?

    Comment by Peter — February 23, 2009 @ 1:45 pm

Comments RSS

Subscribe without commenting

Sorry, the comment form is closed at this time.

Powered by: WordPress • Template by: Eric • Banner #1, #3, #4 by Stephen Macklin • Banner #2 by Mark RaynerXML