Realty Check

Forget Paulson's Pledge, What About Bush's Bailout?

Henry Paulson

I realize today all the headlines are about the Paulson plan to re-regulate the nation’s financial systems in order to prevent the current credit crisis brought on by the recent housing boom. But that’s all about the future.

Over the weekend some news leaked out about the here and now, specifically the President’s plan to bail out troubled borrowers.  Despite the Treasury Secretary’s constant mantra of no government bailout, the buzz inside the Beltway is that the President is backing a plan to allow the FHA to back more loans if the lenders agree to write down principal.

This is essentially what Barney Frank, Chairman of the House Financial Services Committee, is proposing. This is also the first time the White House is talking about federal dollars going toward troubled home loans. Never say never, I guess.

The plan would help out borrowers whose homes have fallen in value to where they are now underwater on their loans, that is, their loan is worth more than their home. An estimated 9 million or so households are supposedly underwater, although not all those folks are in danger on their mortgages. As I keep saying, if they have no desire to move and can afford their monthly payments, then they really have no issues and can and should wait out the market.

The trouble is, and this is the trouble with a lot of these fix-it plans, that the lenders of course have to agree to essentially give money away, i.e. the principal. These lenders gave people money, and now they are going to have to say, ok, you don’t have to give me back as much as I gave you.

I’m of course going to go back to my never-ending argument that while I understand the need to help borrowers, I still say that many of these fixes support unhealthy home prices. This housing market must correct, and that’s going to hurt, just as necessary surgery hurts. Forcing lenders to forgive principal is essentially asking them to let borrowers steal.

Questions?  Comments?