Morning Bell: Another $275 Billion Down the Drain
Conn Carroll /
The House of Representatives is set to vote on a bill today that would round out the legislative authority necessary for President Barack Obama to institute his $275 billion mortgage bailout plan. Taken together the plans three main components (enabling some select borrowers to refinance their loans through Fannie Mae and Freddie Mac, enabling other select borrowers to modify their loans at the cost of taxpayers and lenders, and changing bankruptcy law to allow mortgage cram downs) will bailout the most irresponsible borrowers, raise the cost of borrowing for honest and prudent home buyers, and do nothing to stop the inevitable and necessary correction in housing prices.
- Bailing Out the Most Irresponsible: Obama’s mortgage bailout bestows new and costly benefits on those who took on more debt (including credit cards, auto loans, and mortgages) than they could handle. Worse, the value of the benefits vary in direct proportion to the degree borrowers were financially irresponsible. Borrowers with as high a debt service payment to income ration of 55% will be eligible for the taxpayer bailout.
- Increasing Costs for Honest Borrowers: There are two ways Obama’s mortgage bailout hurts honest home buyers. First, the portion of the plan that makes lenders responsible for half of all mortgage rate reductions will deter private sector investment in all but the best mortgages. Second, the mortgage cram down provisions would create additional risks for lenders who will be forced to compensate for that risk by making new mortgage rates more expensive for future home buyers. First time home buyers and those with moderate incomes would be hardest hit.
- Failing to Stop the Housing Price Correction: Our current economic crisis was created by the inevitable popping of a housing bubble. Our financial system and economy will not recover until housing prices correct themselves. The sharp decline in housing prices is largely confined to just five states (Arizona, California, Florida, Michigan, and Nevada). And the drop in housing prices in these localities is so steep that few borrowers will qualify for Obama’s bailout. Hence home prices will only keep self-correcting. Also mortgage lenders are already at full capacity refinancing borrowers who do not need government aid. There is simply no way the existing industry has the capacity to refinance another 8 million homeowners in time to stop the market correction. Finally, the re-default rates on mortgages that have already undergone mortgage modifications suggest Obama’s mortgage bailout will be, at best, just a temporary band-aid.