Politicizing The Problem
President Obama gave the speech today outlining a plan to curtail the volume of home foreclosures in front of a cheering crowd in Arizona, thereby politicizing a problem that might have been better discussed in a speech from the White House in prime time to a national audience. That would have been Washington business as usual at its best.
Quote: The government infected us with the disease (starting with Clinton and continued by Bush), and now they are trying to kill us with the cure.
Is This Mortgage Modification Ad Depicting A Life Preserver or a Toilet Seat?
The Obama plan is reported to be aimed at helping 9 million homeowners and will commit $250+ billion to it. According to Obama the plan is aimed at "rescuing families who have played by the rules and acted responsibly."
For the people that are buried in a mortgage with payments that they can't afford on a house that is under water, this plan will offer the opportunity to reduce the principal amount and the payment amount. Assuming that they can now afford the new payment and don't become delinquent again, it is a win-win for them. The question is, did they tell the truth on the original stated loan application regarding their income? Did they over commit for a house they couldn't afford looking to get in on the buy and flip mania that was sweeping the country or the idea that even if you stretch the house will appreciate and you would use it as a piggy bank? I am not clear on any punitive measures in the plan, although there may be some.
On the other hand, what about for the approximately 90% of American homeowners that are current on their mortgage and who bought a house that they could afford based on their actual income? If they have a Fannie or Freddie loan and are current they may receive help to refinance at a lower rate.
The argument goes that it will be better for the non-troubled homeowner in the long run because having foreclosed houses on the block does little for home values or neighborhood desirability. This is all well and good and I agree that would be a benefit, but if I read it right we are being asked to subsidize bad acting with the bad actors not being asked to make any real sacrifice.
What will happen if a high percentage of those modified loans for one reason or another go back into delinquency? How will that be handled?
What will happen to the cost of mortgages for good borrowers if banks need to account for their risk of having the government force them to modify the existing loans on their books? If the covenants of a mortgage can be broken and changes crammed down the throats of banks what premium would the banks have to build in. Are we heading in the direction where the government will be the only entity giving home mortgages?
As with many aspects of this stimulus and housing legislation, we will know when we know.
One thing that we do know is that the old saying, the squeaky wheel gets the grease, still holds true.
A government big enough to give you everything you want, is strong enough to take everything you have. Thomas Jefferson