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.