Banks off the hook on Mortgages; We get the Bill
The New York Times has another editorial demanding that the current bill be passed immediately. This must be the tenth editorial with this sentiment over the last few months, with none of them indicating the negatives to this bill.
Let me explain my view of why this is so wrong, in so many ways.
The Times ignores the fact that many of the people who are now facing foreclosure were complicit in driving prices to unsustainable levels. Sure, some were duped, and if they were fraudulently mislead, there should be civil and criminal actions against the perpetrators.
Those who are being foreclosed for equity loans, were not scammed. They did get their checks to spend as they saw fit. With this bill, those who did not irresponsibly buy into a bubble, or use their home as an ATM that they could never pay back, are now being forced to underwrite these new, taxpayer backed mortgages.
This foreclosure Bailout Bill will ultimately benefit the Banks who gave the mortgage loans, with the homeowner acting as the conduit for their bailout. The banks will not reduce their original principle 15% (as the bill requires) for a home near this price; but only to homes at or below it. Thus, the banks will limit their loss, in spite of their responsibility for participating in the the very bubble that has caused this current crisis.
In many areas now being hit, prices had appreciated over a hundred percent in five years. Even if the program works as hoped, it will result in home prices not fully returning to what they would have been had there been no bubble, based on historically appreciation. This bubble has made homes unaffordable to working people, and maintaining it at greater than market levels will price many working people out of the housing market, perhaps permanently.
If a bank does give this new 85% loan on a house at or below this value, the house's value could continue to drop, something acknowledged even by the bills advocates. If this occurs, as is likely since there are other houses below the value of the new mortgage, the owners will still walk away from their mortgages. But with this bill, it will not be the banks who take the hit, but you and me.
In many ways this bill will accelerate the real estate decline. The mortgagor will have little incentive to maximize the price he gets since this new mortgage is guaranteed by the U.S. taxpayers. Or perhaps there will be a call for a new lower principle bailout, so those who rolled the dice in this bubble will get even more subsidies.
This Bill, goes beyond perpetuating a moral hazard, that is, fostering the belief that an individual's financial mistakes will be made up by government. It is downright immoral even if it works as planned, as those who refused to gamble, those of us who were financially responsible, are becoming the underwriters of the both the institutional lender and the intemperate borrower.
And if the plan, with it's intrinsic injustices still doesn't stem the tide, a massive cost is added to our national deficit, speeding dollar's decline and the inevitable inflation that may be catastrophic.
As an illustration of just how corrupt this bill is, John McCain, on April 14th when he was a conservative, was absolutely against this bill. Then someone explained to him how this would bail out his constituency, the financiers of the country, so on April 15th with no explanation he became a supporter of this bill.
Politicians of both parties seem to love it, since it sounds so generous, and they know how few people really pay attention to the actual costs, and dangers of it. Sure, losing one's home is traumatic, and there are many hapless people who got caught up in this who deserve sympathy, but the current bill is a fix that will ultimately harm us all.
Share your opinion in the poll (if it's connected to this essay), and I welcome your comments.