Proposed Homeowner Bailout Plans are Loaded With Problems

 |  Includes: FMCC, FNMA
by: NuWire Investor

by Eric Ames

The calls for a homeowner bailout are becoming louder and louder. After all, why should we bailout Wall Street, but not Joe Homeowner, who was the victim in all this?

Then, of course, there are the financial ramifications to consider. Foreclosures are bringing down the real estate market right now, and isn’t it our duty to save it? If we save the real estate market, then we can go back to the way things were before and everyone will be happy, right? Obviously it isn’t as easy as that, but let’s look at some of the proposals and some the problems that could arise.

We will begin with John McCain’s proposal. McCain would like to see us use $300 billion, taken from the $700 billion bailout package already passed, to buy up mortgages of troubled homeowners. We would then renegotiate the terms of these mortgages to make them affordable for the homeowners.

These mortgages would be purchased in reflection of the current diminished value of the properties, according to the New York Times. “Is it expensive?” McCain said of the proposal, as quoted in the New York Times, “Yes. But we all know, my friends, until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy.”

Sounds pretty fantastic, huh? Couple questions, though: How are we going to make sure that only people who truly need the help get it? It sounds to me like this plan would encourage people to stop paying their mortgage so that they could get some principal reduced and a lower monthly payment.

Furthermore, why should responsible homeowners--and renters for that matter--who have been diligent with their finances subsidize the bad mortgages that these homeowners entered into? What kind of message are we sending when we start rewarding people for not paying their bills? There are many other potential issues with this plan, but for the sake of time, let’s move on to Barack Obama’s plan.

Obama is proposing that we issue a 90-day moratorium on foreclosures, according to the New York Times. So we would halt foreclosure proceedings for 90 days in order to accomplish what, exactly? I’m trying to figure it out, but all I can get from this is that we are giving these homeowners 90 more days to live in their homes rent-free at the bank's expense.

Is this a new version of economic stimulus we are trying to get banks to pay for? The problem is, because the government now controls Freddie Mac (FRE) and Fannie Mae (FNM), taxpayers are going to be on the hook for a good portion either way. So, really, what’s the point? I assume that they are trying to encourage lenders to work out a deal with the homeowners, but how successful do we really think this is going to be?

The biggest positive I think I see in this plan is that it will force banks to work with short sale buyers. Right now all I’m hearing are horror stories about how all these people are trying to buy short sale properties (I personally don’t do short sales anymore for this exact reason), but the banks just aren’t cooperating. If they are going to have to sit on these properties for another 90 days, that might be enough to motivate them to make a deal.

What does this really accomplish for the economy, though? We would have fewer people with foreclosures on their credit reports, but really, this isn’t preventing a property from hitting the market, it is just selling the property earlier on. For the most part, I see this 90-day moratorium as simply delaying the inevitable, and something that people are just going to unscrupulously try to take advantage of. For the clincher, though, let’s look at Obama’s own statement against this plan from last February, as published by the Los Angeles Times: "A ‘blanket freeze,’ Obama added, might 'drive rates through the roof for those trying to buy or refinance. Experts say the value of homes will fall even more, and even more families could face foreclosure.’"

It’s got to be hard to argue with yourself, but I think the February Obama is right on this one.

There are lots of other ideas being thrown around as well, but every one of them has flaws. Frankly, I don’t see how it would even be possible to create a plan that works for everyone. Somewhere along the way, someone is going to get screwed; unfortunately I don’t see how it isn’t going to be renters and responsible homeowners.

Any bailout plan is certain to reward the people who simply don’t deserve it. Maybe we should send out tax rebates to everyone who is current on their mortgage or rental payment instead--at least that would encourage the right set of principles.

The problem, of course, would be that these responsible people are the same ones who would put that rebate check right into savings instead of spending it on useless stuff. Again, no plan is going to be perfect.