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.