Posted in
Economics,
Housing by Administrator on May 8th, 2008
Details are being released on the plan that the House is voting on this week to help strapped homeowners. As you can imagine, it is a bailout that creates an enormous moral hazard. The centerpiece of the plan comes from Barney Frank. It provides $2.7 Billion to help homeowners who are underwater in their homes and cannot afford their mortgage. Essentially, it allows the Federal Housing Administration (FHA) to give new loans to homeowners based on the current value of their home if the current lender is willing to take a loss. So if someone owes $300,000 on a home, but it is only worth $240,000 then the lender loses $60,000 while the homeowner gets a new mortgage for $240,000.
Supposedly, the borrower will have to give 50% of any future gains back to the FHA when they sell or refinance later. Let me see (here comes some sarcasm), I, as a homeowner, am absolved of my losses and still get 50% of my gain when I sell in the future. Why would I ever worry about consequences in real estate when I knew the government would bail me out in the future. In fact, I might buy several homes or get a really big home I can’t afford because the taxpayer will come to the rescue. In the above example, the homeowner can take the $240,000 mortgage and sell a few years for now for the original $300,000. And, the homeowner would still get to keep $30,000 of the gains. Not bad. The responsible taxpayers only get back half of what they paid into the deal.
The second part of the plan is to give local governments $15 billion to buy and rehab foreclosed properties. The theory is they can keep neighborhoods from falling apart due to foreclosures. Of course, I would like to see how the federal government will ensure this money goes to foreclosures. Governments have a sneaky way to spend “earmarked” money on other pet projects. Remember how the $200 billion taken from the tobacco companies was suppose to go to tobacco education for children. Of course, studies have shown only 5% of that money went to the this purpose. The rest went into the general fund for the states.
As you can tell, I am against this measure and hope President Bush lives up to his word about vetoing this bill. First, we need to look at the big picture. Currently, there are only 2% of mortgages that face foreclosure. Is it fair to the 30% who pay their mortgage on time and especially the 32% of Americans who rent (and are probably saving to buy a home) to give preferential treatment and tax dollars to the small minority who made bad decisions? It isn’t fair that someone who rents and is probably saving to buy a home will have his or her tax dollars spent to keep someone else in a home. And, it will keep prices artificially higher thereby preventing the renter from affording a home anytime soon.
Secondly, it is an enormous moral hazard. We are rewarding folks who took a bad risk…period. You can give me the lame excuse that these folks were suckered into subprime loans all day. Not buying it. Even those who were should be ashamed. A house is the largest purchase anyone will ever make. They need to spend a few hours researching to ensure they can afford the home. This isn’t like buying a blender on the home shopping network.
Third, having the local governments fix up houses is ridiculous. Can you envision the graft that is heading our way? I see contractors overcharging to fix homes or maybe contracts awarded on the basis of relationships with government employees. Of course, the local governments will have to hire people, maybe create divisions or offices, to handle these affairs. Once we are through the mess, do you think the government will lay these people off? No way. We are ballooning government payrolls for the long term when a short term fix is warranted. The best way to fix the foreclosure problem is to let the markets work. The prices will drop on foreclosed properties, which will bring buyers. Once the buyers purchase, they will fix the homes by utilizing capital more efficiently than the government.
Hopefully, this bill will get squashed by the President or even sooner in the Senate. It is time we accept responsibility for our actions and let the most efficient party work out the kinks - the market.
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