The Housing Chronicles Blog: Obama's mortgage plan: is it fair to taxpayers?

Wednesday, February 25, 2009

Obama's mortgage plan: is it fair to taxpayers?

Feeling embittered that your tax dollars are going to be used to help people avoid foreclosure who made bad decisions? A 'dust-up' in the L.A. Times ponders the question.

First, from Richard Green at the USC Marshall School of Business and a director at the Lusk Center for Real Estate:

First, many borrowers who were responsible now find themselves in trouble because rapidly falling home prices in some areas have left them with mortgage balances that exceed their house value, because they have lost their job in the midst of a rapidly deteriorating employment market, or both.

The idea of allowing people to refinance into new loans backed by Fannie Mae and Freddie Mac at the current low interest rates -- even if the borrowers now have little or no equity -- makes a lot of sense to me.
Second, the costs of having even irresponsible borrowers default are large.

Recent work by a number of scholars has convinced me that foreclosed houses, once they reach some critical mass within a neighborhood, do substantial damage to the value of nearby houses. Foreclosed houses, moreover, are not well maintained and therefore harm neighborhood aesthetics. I think we must hold are noses and pursue policies that reduce foreclosures, which I believe the Obama plan will do...

On the opposing side, Christopher Thornberg, principal of Beacon Economics and formerly of the UCLA Anderson Forecast:

Taxpayers should resent the idea that their hard-earned money is going to bail out those who took on loans they clearly couldn't afford. They should also resent taxpayer money going to banks whose egomaniacal CEOs take on excessive risk to drive up their annual bonuses to absurdly high levels even as they buy $1,000 garbage pails and walk away rich from the ruin they leave behind.

But there is a large difference between the two situations from a public policy perspective.

When banks fail, the potential impact on the credit markets and money supply is enormous. This is a lesson well learned after centuries of banking crises. It is the reason we have a Federal Reserve bank system...

In short, if we are going to spend taxpayer money, I would suggest that we use it not to help people who spent beyond their means to keep homes they don't deserve, but to help those prudent families take advantage of falling prices by buying empty units. This prevents blight and rewards good behavior, not bad.

And if we really wish to not harm those who may have made a bad choice, how about another basic change: If they allow themselves to be foreclosed on quickly and efficiently, let's not allow any black marks on their credit records. Then they can start fresh and perhaps go buy one of those foreclosed units themselves.

In any case, policy debate aside, taxpayers have little to fear. Most folks out there that used subprime or Alt-A mortgages bought so far outside their means and are so far underwater that there is little that can be done for them within the limited means provided under Obama's bailout plan.

They don't qualify for Freddie or Fannie refinancing, and there is simply no way their loans can be modified to keep them in their houses. As such, I expect that little taxpayer money will actually be spent on the worst of the borrowers.

You can read the entire article here.

With whom do you agree?

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