Column
Modify the Mortgage Plan to Stop FreePassers: There Must Be Pain!
As I mentioned in one of my earlier posts, President Obama has proposed a plan to assist mortgage borrowers suffering from falling home prices and unaffordable monthly payments. It would allow those with minimal or no equity to refinance their mortgages at lower interest rates to bring their payments more in line with their income.
Anger at Rewards for FreePassers
This appears to penalize those who “played by the rules” and reward FreePasser borrowers for irresponsible behavior, and most Americans are furious. According to a recent Rasmussen poll, 55% share this point of view. We also saw the controversy generated by CNBC’s Rick Santelli’s tirade on the subject on the floor of the Chicago Board of Trade.
The Plan Cannot Create an Obama Put
Although many may understand the need for the bailout, they are upset that good borrowers who may be suffering in this economy are also not receiving assistance. It can create a FreePasser mentality that makes people feel that they need not behave responsibly because of a future government bailout.
This sends the wrong message to future home purchasers who may borrow to buy a home. It can cushion the current foreclosure crisis but create a whole new generation of FreePassers with additional, even larger costs to the taxpayer in the future.
In the same way that I said earlier that the Fed (or Greenspan) Put encouraged irresponsible behavior by the finance industry, this plan cannot create an Obama Put for bad borrowers.
There Must Be Pain for Irresponsible Borrowers
The introduction of some type of penalty for those borrowers accepting government assistance might alleviate the anger associated with the situation and reduce the FreePasser danger associated with such actions.
Since the borrower’s economic situation could not withstand any additional cost today, this could take the form of a future fee or tax, and could be taken from the proceeds when the house is eventually sold in a similar way to which points are sometimes assessed when a mortgage is originally issued. It could also be structured as an additional tax upon future income for a period of years.
If such penalties were added, the mortgage plan might no longer be seen as rewarding bad behavior of irresponsible borrowers but could still try to address the current foreclosure crisis.
March 2nd, 2009 at 8:09 pm
Hi Doug,
Among your suggestions, this is most likely to fly with the taxpayers…
This could take the form of a future fee or tax, and could be taken from the proceeds when the house is eventually sold in a similar way to which points are sometimes assessed when a mortgage is originally issued.
There would be some losses for people who sold before the housing market recovers but on the whole this might work.
Of course, a lot of this could have been avoided if Reagan’s toxic anti-government message had never taken root. Government’s do have value. And, one of the most important is to protect the citizens through regulations (one form of regulation is ‘law’). And, this is from me, an ex-Canadian who has seen the worst when Canada was a regulation happy socialist country in the 70s. I still think regulation is very important in finance, medicine and a few other categories that can cost us our lives.
March 2nd, 2009 at 8:28 pm
John,
One must remember that accountability is the key. Regulation without it is ineffective. The last major bank crisis, aside from the S&L, started under Carter because there was insufficient monitoring the risk lending sovereign debt. Unless there is accountability, we merely replace a dysfunctional business with dysfunctional government.
March 5th, 2009 at 10:10 am
Hi Doug,
Yes, accountability is the key. But setting the boundaries that identify what you are accountable for - that is an important part of the process. And, then following with severe consequences for those who cross the boundaries to exploit others. Let’s see what happens to Bernie Madoff or the bankers who broke rules to give themselves bonuses. If the public sees no consequences, then they will never believe in accountability and will demand much stronger regulation.
My point is that Reaganonmics was based on demonizing Government and suggesting that it hurt people and hardly ever helped them (unless it was in the form of the military or police and prisons). Fox News and the Wall Street Journal carried this banner. The Bush gang took this to an extreme and used it to help loot the American taxpayers (no-bid, non-accountable contracts in Iraq, etc.).
Just to be clear - government can easily become dysfunctional. Governments need accountability too.
February 24th, 2010 at 12:51 pm
One must think outside the box with this president. Is his stimulus program geared to manage economic growth or is it geared to manage his control of the economy? I say it is the latter. This president has no intention of doing anything other than to change this country into a European socialist/marxists type economy. The stimulus package was geared to be spent in the latter part of 2010 - in time for the elections and then a straight run to 2012. If this hypothesis is correct, it is a fantastic success.