Government actions to distort markets helped get us into the current mess, and new government action isn't going to improve matters. It will just prolong the agony even longer.
President Obama is unveiling his latest plan, a $75 billion plan to "assist" homeowners, including those who are upside down on their mortgages.
Now, one has to wonder why this wasn't included in the porkfest just passed since it is a "stimulus" for the economy since it is alleged to provide assistance to homeowners who are underwater on their mortgages and would allegedly assist banks who have these delinquent accounts on their books.
This too follows last year's homeowner assistance program which turned out to be a stunning failure because 60% of those who had mortgage terms renegotiated found themselves right back in default within six months.
So, where does the $75 billion come from? $50 billion will come from unused TARP 1 funds, with the rest to be funded by Fannie Mae and Freddie Mac. Freddie and Fannie are also culpable for the real estate market collapse through their awful accounting practices and demands on lenders to increase lending to those who had little, no or bad credit.
Throwing millions of people into a marketplace with bad credit meant taking bad risks and when the real estate bubble burst, these people were in the worst shape of all.
That doesn't mean that they should get assistance because their mortgages are underwater or upside down (they owe more than the property is worth). If these people have the capacity to repay, it shouldn't matter that the property value has declined. Real estate isn't a short term investment, and shouldn't be seen as such.
If you've bought a home, it should be a long term investment, and over that longer time frame, the market will start to come back and prices will once again rise (as they are in some areas of the country).
Flipping is extremely risky proposition despite what the home improvement shows typically televise.
Flippers and speculators should not receive a single dollar from the government for making bad business decisions, although that concept has gone out the window as government looks to plow billions into the failed auto companies and other industries and businesses that would fail but for government action to prop them up and avoid the consequences of being in a market governed by supply and demand.
There are only a few times that this causes trouble is when the person has to sell the home (to relocate for another job, illness, or death of a homeowner). If they are underwater, that means the person has to come up with more money to sell to meet the mortgage obligation in order to buy the next property or cash out. Refinancing homes could be more difficult because the loan to value of the property might require purchase mortgage insurance (PMI) or force higher interest rates to cover the higher risk to the bank. Having recently refinanced my home, I worried about the valuation of my home, but we still were able to refinance based on the new appraisal but others may not be so lucky in hard hit real estate markets like Las Vegas or South Florida or parts of California.
If you don't have to sell, being underwater will not affect your economic situation unless you're looking to use a line of equity or want to leverage your home to take out loans for other items. It actually forces the homeowner to prioritize their expenses.
The flip side to the drop in home prices is that they have become tremendously more affordable to those who are in the market to buy a home. If you are coming from a rental and looking to buy a home, this is a great opportunity in many markets to get into a home after the massive runup for the past decade.
Yet, Obama's economic plan would attempt to stabilize the home prices in many areas still well above what the market prices would dictate. That means that those homes will remain unaffordable directly as a result of government meddling in the marketplace.
Speaking of the markets, they didn't take too kindly to this latest government 'plan.'
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