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

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.

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22 Responses to “Obama’s $ 75 Billion Mortgage Bailout, And Why It’s Doomed To Fail”

  1. isheserious says:

    what about all the subprime loans(the majority of which are not fannie and freddi guaranteed…

  2. Peggy says:

    I totally agree. I am one of the ones that did and continue to do the right thing but will be paying for everyone else. I live in Southern California and my pay, while above Obama’s $75K threshold for a single person, is considered lower middle class with the cost of living in this region. All of this stimulus should also be based on cost of living in a region,up to a point.
    I would suggest that they put some stipulations on the “redo” loans. For example, you purchase your home at 340000 but it is now appraised at 260000. You refinance down to the $260K. In 5 years, the economy is better and you now sell your home for $360K. You should have to pay back the 80K that was written down. Why should you profit margin be more than someone who was just on the edge of under and couldn’t get a refi?

  3. regretbeingprudent says:

    Boy am I feeling stupid right now. All of these years my wife and I have lived within our means because we did not want to finance more than we could afford. If we had known that some day we would have leaders who would reward people for getting too far in debt, I might have done things differently. Oh well, what’s another few hundred dollars of public debt on the backs of my kids.

  4. I happen to be one mof those who did not take an adjustable rate mortgage nor did I refinance at the unrealistic evaluation for my home, but I do understand that something must be done because the failing/falling housing market has an effect on the construction industry and all those many skills and industries that support it. I support this effort to do some thing.

  5. lreelitz says:

    We are now seeing what “Obama for Change” is all about…
    A change to socialism
    A change to re-distributing wealth from the responsible to the irresponsible
    A change to bigger, bigger, bigger government
    A change that now ignores and penalizes personal responsibility
    Who in the name of God is ultimately going to pay for all of this change…this is a path leading to the destruction of every principle this country was founded on.

  6. sbudz says:

    yeah. we need to let the FREE? market completely collapse and help the entire world economy slide into oblivion.
    then maybe we can have some good old wars to allow the best one’s to win. Hell it worked in the 1930’s, it could work now. let’s rebuild out of the ashes of the destroyed world.

    maybe next time we can allow all the corrupt rich businesses
    that will buy our politicians and be allowed to sell ponzie schemes to the consumer.

  7. Bill says:

    This seems to be darwinism in reverse promote stupidiy. It is sad. I avoided variable rate loans and a significant cost (as it turns out) because I am averse to risking the roof over my head and that of my family. It is shocking what led to this. NINJA loans (No income, no job, No Assets) loans that some inconceivable percentage of people were unable to make the first payment on. The banks deserve to fail, the people who cant make decent decisions should receive their default as a lesson and the country should leave the market to decide who survives. It is a cold hard choice, but the only one that makes sense. Too bad, government interference will hurt us.

  8. steve says:

    What are we teaching our kids. It’s okay to be greedy and not be responsible for our own actions, “The government will bail us out!” No wonder why the economy is collapsing.

  9. Andy Croxton says:

    This is great if your trying to accomplish redistributing the wealth of the country. It would have been far more stimulative and beneficial to all not to have cut the amendment to the stimulus package that would forced lenders to refi and grant a 4% mortage to all who applied. Instead we are building a ma rail for Harry Reid. But hey noe we can continue down the path of ananimity and become the borg society that democrats so wish every day.

  10. tfr says:

    Ok, I’m another sap who lived within my means.
    re: preserving construction jobs. We don’t need to. The fact that we’ve had a bubble means that housing construction was being done far in excess of actual demand. We can live on the surplus for a while, and prices will adjust to something realistic. At least, that’s what would have happened if Obama and Co. hadn’t started messing with it. Yes, it’s sad that construction workers will have to find something else to do, but is it realistic to expect to make 6 figures for a construction job year after year?

  11. [...] financial bubble, they did everything they could to sustain it and, even today, are implementing policies that are ultimately aimed at re-inflating the housing bubble that started this [...]

  12. kerry says:

    im am one who was mislead and misdirected from greedy people.. when are us normal hardworking middle class people going to get help.. my first home, partially my fault for signing something i did not know much about.. whatever happened to a man being as good as his word???
    these loan companies misdirected and mislead people into these loans . we put our trust in someones word and now our homes and kids and families ar at jeopardy !!!! help us normal working people who are bringing up kids. the loan companies should be punished by eating their f—d up loans and rewriting the loans to what they have shouldve been..
    LIVE AND LEARN. may have to start over due to ignorance of these billionaire banks.. makes me sick to my stomach

  13. bill johnson says:

    Let me get this straight.I WAS a successful 48 year old salesman who recently lost his job due to government forcing banks to loan to people who had no ability to pay the loans back, which resulted in the longest and deepest recession since the Great Depression. I am still paying my bills, and still have equity in my house (yes, I was one of those responsible fools), but cannot find a job in this economy, and very soon may be forced to either sell my house if I can, or go into forclosure (can”t refinance the house and get equity if you don”t have a job). So, Obama wants to give the same fools that borrowed beyond their means a huge HELPING HAND to stay in their homes, but for people like me, who are the true victims, we get no help at all. About sum it up? Anyone want to join me in the bathroom to vomit?

  14. Kenski says:

    I’ve read a dozen of these type blogs lately, blaming struggling homeowners for the End of the World as We Know It (and I feel fine). Suddenly every kid with a half a semester of poly sci is a flipping Nobel expert in economics. It’s fun to stand in judgment over others and blame them for your troubles, isn’t it, Captain Hindsight? Where were you 7 years ago when I bought my home? Back then, even my colleagues in the Economics department were all advising, “Buy, buy, buy – real estate equity is safe as houses.” I guess they were right.

  15. Not everyone was in love with the real estate bubble, my friend.

    Those of us who weren’t were dismissed as party-poopers and kooks.

  16. Mike Manges says:

    Those of you who lived within your means don’t understand BHO and his ilk. They believe even you have accumulated too much wealth at the expense of the disadvantaged. The jobs you lost paid you too much and needed destroying, and the earnings of those still employed are based on an ‘unfair’ theory distribution. To quote my nephew, a recent graduate of Ohio University, “Communism wasn’t a bad system. It just had bad leaders!” BTW, what Bill Ayers means when he says he’s a small ‘c’ communist is he doesn’t support physical terror of the ’systems’ enemies as did Lenin and Stalin.

  17. Mike Manges says:

    Another thing you must remember when dealing with a leftist is the ends always justify any means. A leftist doesn’t restrict himself with contemporary morays and to try to compromise with them is impossible. They consider a compromise a pause in the struggle. The struggle will be taken up again when advantageous, i.e. gun control. That’s why BHO is able to promise one thing today then next week say the opposite with all sincerity. A person who isn’t moral has no concept of honor. What he says matters only insofar has it promotes his objective. What he does is what counts and the goal is the only thing that matters. What is the leftists the goal? Nothing short of the complete destruction of the middle class. You don’t need me to list examples of the attacks, either.

  18. Norman says:

    the govt should place a lein on all bailouts. no bos if any leins exsist. HandOuts for People Everywhere = HOPE

  19. Norman says:

    the govt should place a lein on all bailouts. no bos if any leins exsist. HandOuts for People Everywhere = HOPE

  20. Michelle says:

    I am very disappointed in the refi portion of this plan. Apparently the govt is setting up a “program” that costs 75 billion that says IF you have a mortgage with fannie and freddie now, and IF you can pass *current* debt to income ratio requirements (which were surely not in place when you got your mortgage) and IF you owe 105% or less on the mortgage, you can refi. Well WHOOPIE DOO! Wells Fargo is refi-ing everybody who has 90% equity right now with those criterion. The problem is that all the current people can’t refi because they OWE 150% of the property value or their mortgage is 60% of their income or something. But if these people are current, they should be allowed to refi under this plan, since the govt already owns the mortgage (another stupid requirement). I am VERY DISAPPOINTED in this plan, it doesn’t help anybody meanwhile we are paying trillions to bail out all these banks.

  21. Mark says:

    I completely agree. This plan is ridiculous. How do we best let our representatives know we will not stand for this.

  22. Xander says:

    The above comments all have some validity. But, personable responsibility is the most important point. Too many people, for too long, have jumped on the bandwagon without forethought or research. We are ALL CULPABLE IN THIS CRISIS. Being part of the ‘flock’ instead of questioning the supposed experts is reprehensible and foolish. It is going to take an enormous consertive effort from everyone to try and relieve this pressure before it implodes. Everyone needs to ask themselves, “How much is enough?” Without that personal responsibility and maturity, then opulence wins. Proletariat or bourgeoisie doesn’t matter. John Locke even warned hundreds of years ago that capitalism, at some point, eventually fails.

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