The new Obama housing plan is going to give a break to those who least deserve it: people who bought more house than they can afford. It will reward those who made all the wrong decisions.
I've written about this before, but I have to readdress it here because I'm absolutely gobsmacked.
Think this through for a second. Your home value, along with all your neighbors, has gone down in the last year. But now your neighbor, who bought above his means and can’t make the payments, because of a reset to the REAL monthly cost of the loan, is suddenly going to get a gift. Well what about you? You did the right thing. . You didn’t buy more than you could afford. But you don’t get a break.
What They'll Get
This is straight from the White House Fact Sheet: "To provide extra incentive for borrowers to keep paying on time, the inititiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1000 a year for five years."
The Obama administration's summary of the plan said the plan could offer a buffer of up to $6,000 against value declines on the average home.
And the loan servicers, don't forget them. Banks will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive “pay for success” fees—awarded monthly as long as the borrower stays current on the loan—of up to $1,000 each year for three years.
By the way, all the banks that have accepted TARP funds? They have to comply with all this. That includes Citigroup , Wells Fargo , Bank of America , Goldman Sachs , and JP Morgan. So far the stocks aren't acting well in the face of this plan which is supposed to help them.
The proponents say you have to stop the decline in housing prices. Why? We get e-mails every day from frustrated savers who believe now is there time to be rewarded—with a home, or investment property they can finally afford. But the government wants to do everything to punish those people, and keep them out of the market, even though they did the right thing.
Instead, they are going to have their taxpayer money transferred to someone who made bad decisions. $1,000 for the homeowner, $1,000 for each modification. That's $2,000 per loan of YOUR MONEY being given away.
There are other options. They aren’t great either but they are less likely to cause terrible moral hazard and induce other homeowners to try and get a break on the back of other taxpayers. You can reduce the interest rate, lengthen the term of the loan so the monthly payments are more affordable. Better yet, let the market handle it.
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