Rewarding Deadbeats, Punishing Responsibility

In a nutshell, that's exactly what President Obama's mortgage relief program will do for homeowners. It also stands to further nationalize the mortgage industry, giving still more power to Fannie Mae and Freddie Mac, both of which are at the heart of the mortgage industry meltdown, and yet which both have escape serious scrutiny on Capitol Hill.

Who benefits from this plan?

Homeowners who wrote checks for a significant down payment won't benefit as much as those who took 100 percent financing. Homeowners in states without significant foreclosures will subsidize those in states like California, Arizona, and Florida. And borrowers who initially had affordable mortgages -- but then refinanced during the housing bubble and used their homes as ATMs -- stand to benefit.

So, if you put little or no money down, you'll get a bailout assist, but if you put 20% down in a traditional mortgage, you'll see little benefit. In fact, your tax dollars will be going to prop up those who made the far more risky mortgage choices.

This removes the risk of loss from business decisions that have more risk associated with them. In fact, it would force people to conclude that it makes more sense to make the riskier decisions rather than tried-and-true methods that contain less risk because the government will come and bail them out at the first sign of trouble.

Never in our history has anyone provided the kind of foreclosure relief that Obama has proposed and there are good economic reasons that hasn't happened before.

The economic theory behind this isn't to help those in foreclosure, but to prop up the real estate market. By curtailing the foreclosures, or stringing the foreclosures out over a longer timeframe, the belief is that the home prices will not drop as fast or as far as they have. That's a benefit only to those who have to sell their homes, but actually makes buying a home far more unaffordable than if the market corrections were allowed to take place without the government intrusion.

The real estate markets around the nation are not uniform by any stretch as the Case Shiller reports indicate, and some markets are doing far better than others. Around the NYC metro area, there's a wide range in sales and home price changes year over year. The market is factoring this in when prices come on the market, and Obama's plan will short circuit the correction in prices to where they would be more reasonably priced in the current market.

The correction in prices means the homes become more affordable. The use of foreclosures makes homes more affordable. Obama is engaging in a policy that distorts the market to make homes less affordable all while claiming he's pushing affordable housing.

This is precisely how the markets entered the real estate bubble in the first place - by distorting the market through government intervention and pressuring lenders to provide mortgages to those who should not have been given mortgages on properties they sought.

Indeed, why should someone making $80,000 with no money down be able to buy a home worth $500,000? That's insane, given that they'd be putting 50% of their income to mortgage and carrying costs and most guides suggest that you put no more than 38% of your income or 31% of net income to home costs. Things are tight enough as they are when you put 20% down on a home within your means, and yet these people were busy buying homes far above their means with other people's money without caring for the consequences of being unable to repay. When times were flush, they could simply flip the home and bank the difference (if any). Those times are over. Banks aren't going to simply hand out mortgages as they did in the past, but if Congress keeps pushing for lenders to give loans to the undeserving (based on credit history and ability to repay), then we'll be in this mess for years to come.

Then, there's the whole notion that the terms on some mortgages can be renegotiated. That's been an abject failure. 50% to 60% of readjusted mortgages under the last bailout have resulted in redefaults. These people simply should not be rewarded yet again for having made bad business decisions. And yes, it is a reward to get a renegotiation of their mortgage without having to pay refinancing fees and costs. Having just gone through a refinancing myself, I know that there are costs associated with one that can be several thousand dollars.

That's free money to people who have already shown that they can't afford these homes, and a further refinancing will not help someone who has lost their job keep a home. Downsizing is the option - renting is the option - not keeping a home they have no ability to pay for. Someone will eventually buy the home at a more affordable price, because the inventory of homes in some areas has grown and demand has not yet come back.

Michelle Malkin breaks out how people in the nation live - whether they rent, own, or if they're in default or are in foreclosure. Renters are getting the worst of it since they would see little benefit from this at all, particular those people who would contemplate buying a home and transitioning from a rental to ownership because affordable housing becomes less affordable under Obama's plan.

It's instructive to note that the overwhelming majority of the nation is living in homes they own outright, rent, or are current on their mortgages. Only 7% are in default or are delinquent. Those percentages are high for recent history, but are not a reason to gut the entire real estate mortgage industry by rewriting the rules to benefit those who made the riskiest of decisions.

UPDATE:
David Brooks calls this money for idiots. Apparently, they're not idiots since they've found a way to profit from passing on the risk to the rest of us. Those of us who have done the responsible thing are the idiots, which stands the whole basis of the real estate market and economics in general on its head.

UPDATE:
The White House is busy criticizing Rick Santelli who slammed the Obama mortgage relief plan yesterday on CNBC. White House flack Robert Gibbs says that Santelli ought to read the plan first.

Instapundit notes that Gibbs criticizing Santelli over not reading the Obama mortgage bailout plan is rich considering that Congress didn't read the $879 billion porkfest that Obama signed into law (without reading).

Santelli's response is also classic.

We know Wall Street's grade for President Obama since taking office. It's an F. The stock market has shed nearly 10% of value since the inauguration, and Obama has done little to show optimism in a rebound. Instead, he keeps talking down the economy further so as to propose still more government stimulus packages.