Friday, March 26, 2010

More government encouragement of irresponsible behavior

President Obama continues the traditional government policy of rewarding irresponsible behavior:
The Obama administration on Friday will announce broad new initiatives to help troubled homeowners, potentially refinancing several million of them into fresh government-backed mortgages with lower payments. ...

The administration’s earlier efforts to stem foreclosures have largely been directed at borrowers who were experiencing financial hardship. But the biggest new initiative, which is also likely to be the most controversial, will involve the government, through the Federal Housing Administration, refinancing loans for borrowers who simply owe more than their houses are worth.

About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak.
So, if you bought a house with a large down payment, you reduced your risk of ending up underwater, and reduced your chance of government help. If you bought your house with no money down, you easily ended up underwater, and therefore get government help.

If you didn't cash out your home equity during the bubble, you're less likely to be underwater, so you don't get help. If you did cash out your home equity during the bubble, and bought lots of cool stuff, then you do get government help.

This is not just a subsidy for irresponsible homeowners, it's also a subsidy for banks holding bad loans:
Many of these loans have been bundled together and sold to investors. Under the new program, the investors would have to swallow losses, but would probably be assured of getting more in the long run than if the borrowers went into foreclosure. The F.H.A. would insure the new loans against the risk of default. The borrower would once again have a reason to make payments instead of walking away from a property.
Let's not also forget that the FHA is already on very shaky financial ground. Any FHA losses will come out of the pockets of the American taxpayer:
This much was clear, however: the plan, if successful, could put taxpayers at increased risk. If many additional borrowers move into F.H.A. loans, a renewed downturn in the housing market could send that government agency into the red.
This plan is just a way of shifting the burden of loss off the backs of those who engaged in irresponsible behavior, and onto the backs of taxpayers. Of course, if the housing market kept going up forever, homeowners and banks would have pocketed all of the gains. Homeowners who made the smallest down payments would have gotten the highest return on equity. Heads they win, tails we lose.


  1. From the well respected professor piggington (Rich Toscano):

    Last month I discussed the idea of government-sponsored mortgage principal reductions, which I described as the "nuclear option" in the government's housing bailout arsenal. As unjust and misguided a policy as this might be, I suspected at the time, principal reductions might well be on the way.

    Well, the first volley of bailout nukes has been launched. The Treasury has announced a plan to reduce loan balances for underwater borrowers by refinancing the borrowers into FHA loans with lower amounts or by bribing lenders to reduce principal balances themselves.

    So it has begun. The only question is how far it will go. This particular program is supposed to be funded by $14 billion out of existing foreclosure-prevention funds. But as we have seen, when it comes to the bailout, the rules are changed when it becomes convenient.

    This is really the first foreclosure-prevention approach to date that is likely to actually prevent foreclosures. Now that the principal reduction line has been crossed, we could see a lot more of it -- and it could have a huge impact on the future of the housing market.

  2. Sucks for people in their mid to late 20s, like me. I am now making enough to buy if there were no bubble, yet I wont be able to buy because of the crazy prices of today. Oh well, renting isnt so bad.

  3. An intesting story on renting in the DC area, tune in tonight on your local NBC News4 at 5.

    Looking for a place to lease in the Washington area? Prepare to pay. How does DC rank among other metropolitan areas? More on this tonight on News4 at 5.

  4. The Wasington Post classified section is filled with so many foreclosures. I can't remember the classified being this thick as today's.

  5. Well, either you havent been reading long, or you have a short memory. For the DC area, forelcosures are down -10.4% YOY.

  6. Or, perhaps you are interested in late bubble burster MD

    Foreclosures per realtytrac:

    NOVA -49.7% YOY
    DC -14.0% YOY
    MD* +42% YOY

    *PG & MO CO only.

    In MD, youve got a ways to go. In DC its windin down. In VA its over...

  7. Last year's government interaction attempts failed to address the regionality issue i.e. the areas of the country that saw significant price reductions.

    Last year's approach was so dumb because the overwhelming majority of people who got to take advantage of refinancing were those that never got hurt by the bubble so the medicine got administered to the wrong people.

    Making responsibility pay is not this Administration's goal. Their base are the irresponsible ones wanting a government handout. The Unions have their pensions grossly underfunded so they are desperate to also fall into the public safety net. That public safety net should be for those that really need it and people shouldn't go into the public sector to get rich. After the Unions ran the private industries out of town, they then latched onto the public sector and in the last fifteen years, have grown government salaries out of site and layered in unsustainable benefit packages. They have hurt our competitiveness and looted us period.

    Printing money to devalue our debt will be the face of the new Ugly American. And to think that people voted for Obama because he would be the positive face of America. Bush got rid of a barbarous tyrant who paid rewards to the terrorists that attacked us and he hunted down the terrorist organizations; apparantly that wasn't politically correct and the liberals are telling us that we can't call them "terrorists". We have to now have sympathy for irresponsible people, terrorists, those that dislike us for the wrong reasons; and those dumb enough to work hard and be responsible will have to pay the tab for this public looting.

  8. "Bush got rid of a barbarous tyrant who paid rewards to the terrorists that attacked us and he hunted down the terrorist organizations..."

    LOL! Can I smoke some of what you're smoking?