President Obama’s home mortgage relief plan is the latest in a series of bad ideas. Like most government intervention, it sounds reasonable to the casual listener. But there are serious problems.
“Right now, there are more than 10 million homeowners in this country who, because of a decline in home prices that is no fault of their own, owe more on their mortgages than their homes are worth…It is wrong for anyone to suggest that the only option for struggling, responsible homeowners is to sit and wait for the housing market to hit bottom. I don’t accept that. None of us should.”
As expected, the President’s speech was replete with blame for the “evil bankers” and did not reference entities such as the Federal Reserve, Barney Frank, or the Community Reinvestment Act. It might be convenient to blame Wall Street for the mortgage crisis, but this narrative is simply false (and has been debunked in earlier posts). Unfortunately, his proposal to resolve the crisis suffers from the same evasion of reality. The entire speech was flawed and worthy of analysis, but I will focus on three glaring errors in the above quote to remain brief.
1. Granted, a decline in housing prices are not the fault of homeowners, but risk is inherent. Nobody is required by law to purchase a home. Obama is asking all of us to accept responsibility for declining home prices. If it is not the fault of individual home buyers, it’s certainly not the fault of society in general.
2. When Obama refers to the “only option for homeowners” he clearly means the only government option. Once again, the President assumes that individual hardship necessitates government (collective) intervention.
3. Obama says he is unwilling to “sit and wait for the housing market to hit bottom?” By definition, prices that “hit bottom” are returning to a lower market level. By making this statement the President acknowledges that a housing bubble still exists. In effect, he is proposing to outsmart the market and keep prices artificially high by allowing homeowners to refinance at artificially low rates facilitated by the Fed and FHA (taxpayer) loan guarantees. Needless to say, homeowners who refinance would still owe more on their homes than they are worth. Besides, if we keep housing prices from readjusting now, when will we let the market take its course?
In a nutshell, the President’s proposal is a repudiation of free enterprise. He is arguing that society (through its elected representatives) should determine what is right and fair, and then intervene in markets accordingly. The fees passed along to “big banks” to help fund the program would come right back to consumers in the form of higher ATM and other charges. Every underwater home that is refinanced at today’s rates injects more air in tomorrow’s bubble. Central planners like Obama seem content to leave the aftermath of unintended consequences to the future taxpayers. We must rebuild our economy on market reality, not class warfare or social justice. There is no sustainable alternative.
There isn’t a good way out of this mess. Anything we can do to get the payments down helps.
Are you kidding Larry? you can’t lower payments out of thin air. If we let the housing market bottom out then houses will be more affordable for everyone without Ohama’s help.
While it’s not the fault of the homeowner that the housing market collapsed, neither is it the bank’s. People like to blame the financial institution, but the fact remains that the bank assumed the risk of lending money to a home buyer who promised to repay the loan as agreed upon in the contract. Now that the market is down, the home owner wants to renegotiate. I’d be fine with that, if the public agreed that when the opposite occurs, the bank should be able to renegotiate. For example, if the bank lends you money at 3% and rates go up to 5%, shouldn’t the bank be able to change your mortgage rate to 5% and recalculate your payment to be higher? Wouldn’t that be “fair”? Everyone wants fair until it doesn’t work in their favor.
wrong, DG. Nobody reads all the loan paperwork. The bank has too much control. I have a right to a loan if I can pay it back. If the government stays out, we’ll always get screwed.
Vic is signed up for the nanny state. Personal responsibility is so old fashioned.