Adding Seconds to a Ticking Time Bomb
February 19, 2009 1 Comment
“All of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen…if we act boldly and swiftly to arrest this downward spiral, every American will benefit.”
-President Barack Obama
President Obama announcing his mortgage relief package in Arizona
Yesterday, President Obama announced a $275 billion package aimed at aiding struggling homeowners at risk of foreclosure. The plan allows these homeowners to refinance their loans through the government-controlled mortgage giants Fannie Mae and Freddie Mac, while also providing incentive to lenders to modify loan terms for people at risk of foreclosure or already in foreclosure proceedings. The combined affect would be substantially lower mortgage interest rates and monthly payments for these at risk homeowners, something the Obama Administration hopes will reverse the housing downturn by stalling foreclosures. While President Obama is right to say that the housing crash has greatly damaged the whole of the market (see The Financial Crisis Part I), and this is certainly a step in the right direction, the plan is deeply flawed and may lead to significant long-term consequences.
Subsidizing poor investment: First, as noted in a previous post, sub-prime mortgages were the primary driver of the financial crisis. The proposed plan does not solve the sub-prime problem, but instead props up these poor loans for a little while longer. The homeowners who are at risk of foreclosure purchased beyond their means, meaning that their income could not pay for the quality or price of house they now own. Simply lowering their interest payments and restructuring their loans does not come close to elevating their mortgage values to what lenders consider prime or even stable mortgages. Said Alan White, an assistant professor Valparaiso School of Law, “You’re building payment shock into people’s loans, and the payment shock is what created the problem in the first place. You are assuming again that home prices will continue to rise.” The plan attempts to delay high payments in the short term by restructuring loans, but the true value of the house and the required payments have not changed. In fact, a recent study by the Office of the Comptroller of the Currency (OCC) showed that nearly 60% of at-risk home buyers who decide to restructure their loans default anyway. Why? Simply put, the irresponsible buyers have not changed; the value of the home has not changed; so the risk of foreclosure is not substantially affected. Rather, we are simply adding seconds to an already ticking time bomb.
Inflating the housing bubble: The housing bubble initially inflated because of the mass issuance of sub-prime loans, which led quickly to the over-valuation of real estate. Sub-prime loans essentially increased the demand for housing artificially, which in turn artificially propped up housing prices. The bursting of the bubble, as a result, was the market returning housing prices to their proper levels–a market free of sub-prime loans (as with all bursts, the market decelerated beyond its true normal valuation, but that will correct over time). The Obama Plan will inflate the bubble yet again by keeping sub-prime homeowners and mortgages in the system, propping up demand beyond its normal limits. It is simply setting us up for another burst and another future recession. This is especially true when you consider the rate cuts and restructuring inherent in the plan–we are ‘re-inflating’ the bubble.
Taxpayer dollars: Significantly, the plan is being fully funded by taxpayer dollars, with the public absorbing a minimum of $200 billion worth of risk that will be passed to the government-owned Fannie Mae and Freddie Mac. If you were responsible when you purchased your home and did not spend beyond your means, then you are not helped by this plan. The government is using responsible taxpayers’ money to pay for the indiscretion of the irresponsible. If you follow the dollars through to the end of the plan, taxpayers are essentially paying irresponsible homeowners’ mortgages through lower rates and adjusted principle. This is not to mention that the risks inherent in this plan are far too heavy to place on the public. If these were toxic loans before, they will continue to be toxic in the future. Now, however, the risk of default has been shifted from the banks and the homeowners themselves to the taxpaying public.
A better solution: The solution to the financial crisis needs to span more than just the housing market, but it is an important place to start. However, rather than prop up at-risk homeowners and expose the public to all the risk of default, we would be best served by providing a tax credit to all homeowners. This would serve the dual purpose of helping at risk homeowners pay for their mortgages without inflating the bubble with new loans, and give those stable homeowners more money to pour back into the economy through investment and consumption. Furthermore, it does not widen, but shrinks, government’s reach in society, and eliminates the public absorption of risk while keeping it where it belongs–in the market. To have an impact, the credit would have to be significant (unlike the Bush plan of $600). Instead of the $275 billion the Obama Administration plans to spend on this package, a $2500 tax credit per household would be of equal value and far more impactful. This is fair, just, and helps all levels of the taxpaying economy.
-Matt Benchener from TruPolitics.net
Really! $2500 a household is fair regardless of how wealthy you are!?! First off, the economy will be most beneficial if the money is given to lower income families. In these troubled economic times the rich will horde/save the money, but when 2500 is given to a poor person they will spend it, creating GDP growth.
You say that the responsible homeowners don’t benefit from the plan, but they do, because the market isn’t flooded with foreclosed homes so they are able to retain their home value. If all the people in foreclosed homes lost them, your house would be worth half of what it is.
Like always, the rich try to manipulate the system in order to line their pockets with the green stuff regardless of who they step on to get it. You talk about what a “just” plan would be, but I don’t think you have any idea what justice is. Justice is the person in the city being able to find a job that can support his family. Justice is being able to get a job that isn’t landscaping or construction as a hispanic. Justice is us living as one, without socio-economic divisions or divisive religion promoting hate, or the rich trampling on the poor until they believe the lies you have infused into their heads about being dumb, lazy, and immoral. Justice ought to be blind, but if America is justice, then justice dead.