This plan has been particularly galling to many taxpayers, sparking widespread “Chicago Tea Party” protests last week. The argument is that this plan rewards bad behavior because many, and seemingly most, of the intended recipients of such taxpayer-funded charity are undeserving.
I’ve been looking out for information on the people currently in default on their mortgage loans. On the February 23rd Cavuto show on the Fox Business Channel, Bill Procida, represented to be a specialist in “toxic mortgages,” addressed this question. He explained that of the roughly 8% of mortgage loans that are currently in default, about half are for 2nd, 3rd, or 4th mortgages – i.e., they are not on the borrowers’ prime residences. He said that many of the rest are re-financings where the owners have previously taken their equity out as cash; that’s why with the recent drop in housing value their property is worth less than their mortgage loan – they took cash out and spent it. Some of the remaining are investors or speculators who bought property in a booming market hoping to sell later for a big profit. Only a fraction of these mortgage loan defaulters could even begin to fit the image of struggling families unable to pay the mortgage on their primary home. Procida doesn’t at all accept the argument that we taxpayers must bail out these defaulting borrowers in order to save the broad housing market from collapse.
I’ve also wondered how many of the defaulters are in Florida and California, places where the housing bubble seems to have been the biggest. I found the following intriguing. Alan Reynolds of the Cato Institute wrote this (link) in the New York Post:
When President Obama discusses his … mortgage bailout, he talks as if it was a national problem…. "We must stem the spread of foreclosures and falling home values for all Americans," he says. But…. most of the United States will pay for the folly of few. The beneficiaries of taxpayer charity will be highly concentrated in just five states - California, Nevada, Arizona, Florida and Michigan. That is not because the subsidized homeowners are poor (Californians with $700,000 mortgages are not poor), but because they took on too much debt, often by refinancing in risky ways to "cash out" thousands more than the original loan. Nearly all subprime loans were for refinancing, not buying a home.As for the government forcibly lowering (“cramdown”) the principal on some loans, it seems to me that in the end lenders would have to raise rates for everyone to compensate for the extra losses they would incur from the higher rate of defaulting. Again, the many would subsidize the very few. On February 23, Stephen Spruiell wrote at “The Corner” weblog at National Review Online:
Broadly speaking, this would mean higher interest rates on home loans for everyone from here on out. If bankruptcy judges can write down the principal on home loans, banks will adjust interest rates upward to account for the increased risk. Even economists who favor the cramdown are frank about this — they just think that the negative effects of foreclosures are worse than the price we will all have to pay for this sweeping legislative change. As [was] pointed out earlier, that conclusion is probably mistaken.Then I wonder – if we could eliminate the 2nd mortgage loans, the refinancings, and the speculators, could such a proposal at least help the truly unfortunate stay in their homes, or would we the taxpayers be throwing good money after bad? From a recent Wall Street Journal editorial (link):
The recent history of mortgage modifications isn't encouraging…. [F]rom those who received a mortgage loan modification, a 55% default rate after 6 months.Finally, despite all of the above, I wonder if there is much merit to the argument that we need to forestall foreclosures to stabilize home prices for everyone? Are we at the bottom or are home prices still too high by some historical reference point? Alan Abelson wrote (link) in Barron’s recently:
[T]he two charts [on] this page [from the firm ISI] provide eloquent and graphic descriptions of why … there's still plenty of room on the downside for [housing] prices. [O]ne shows the ratio of house prices to rents; the other, the median house price divided by median family income. At a glance, they both relate the same message: House prices are still too high, and not by a modest amount, either. Nor, ISI reckons, will reducing the number of foreclosures … halt the erosion in prices. While fewer foreclosures are likely to slow the rate of decline, they won't reverse the downtrend or determine "where homes prices end up." House prices, in our bloodshot view, have another 20% or so to fall before hitting bottom and, at the earliest, we're talking sometime next year.So in the end, I conclude that a taxpayer subsidy of defaulting borrowers for the most part is going to benefit few “deserving” people, will not likely prevent many foreclosures anyway in the intermediate term, will primarily benefit people in a handful of states at the core of the housing bubble who were for the most part willing participants in the run up, and would wind up costing everybody not only now for the cost of the bailout but for years through higher mortgage loan interest rates.
So why would Obama want to do this? He and his team must know all of this far better than I. I can only speculate: public relations – promoting the image of the compassionate great healer. And, in his mind, after all, only the “rich” will be paying for the giveaway anyway.
JM Greco
