Proposed Homeowner Bailout Plans are Loaded With Problems

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.

Comments

[Lok Sang Ho:]

I have been proposing that, instead of buying soured mortgages, the US Government, with Fed backing, make a buy-back offer to owners of existing homes at a "fair price", calculated as the initial purchase price paid by the owner plus or minus a percentage increase or decrease as reflected by the local or national housing price index, as of some cut-off date. I proposed that the offer be made to existing homeowners of homes below the national median price. This effectively sets a floor to one half of the country's home prices. As a result of this guarantee, home purchases offers upside potential without downside risk. This is the surest way to stabilize the financial market, since slipping home prices increase defaults and undermine the balance sheets of financial institutions.

The government can hold on to these real assets until market conditions improve and then it can sell them at a profit. Thus there will be little cost to taxpayers.

This is the surest way to stop the vicious fear-fear spiral. One other attractive feature of the plan is that real prices can still adjust as inflation reduces the real price of homes. Finally, the home prices today are actually in line with per capita GDP trends and therefore should hold under normal circumstances.

2008 Oct 23 08:36 AM

[Augustus:]

My Yukon is worth less that I paid for it.
Should the lender give me a free 90 days of use without payment?

How about the upgrade to the marble countertops? can I get 30 days on that item?

It is just nonsense to expect that. If Obama wants to send his personal check to the bank to make someone's mortgage payment, good for him. I'm sure Rev. Wright would appreciate the assistance on his home loan.

2008 Oct 23 09:18 AM

[Yogidad:]

First: Enjoyed the article and made good points. A complete discussion of the failings of the candidates' proposals would be interesting and helpful.
Also, although I like Lok Sang Ho's general notion better than the candidates', I don't think that the plan would work either. I.e., Deliver an offer based on an appropriate appraisal standard to those owners and/or banks for viable properties. A certain segement of the foreclosure market could be assisted I guess but I don't think you could get very far with alleviating the crises. The same segment would probably voluntarily refinance if reasonable rates were offerred in general and penalties and prohibitions were eliminated.

2008 Oct 23 09:26 AM

[ArnoldCountry:]

While the McCain proposal may be wrong, underlying, he is the first one to accurately understand the core of solution, you need to stop the falling prices of real estate. His approach to achieve this solution is flawed.

The Obama approach is alive and well in California which has temporarily slowed foreclosures while lenders must comply with new notice requirements and delays... but we will see soon the flood of foreclosures.

Truth is, lenders are not really working out loans with consumers. They are churning out paper and making a lot of noise but consumers are being misled, loan mods and short sales are more focused on helping the lenders and not helping the consumer. Note: Persons who refi'ed and are in trouble really need to have their loan documents evaluated for TILA violations as they may be able to rescind as the best remedy.

With all that being said, a method of implementing a solution to stop housing prices from falling is quite simple:

1. Government provide financing to a new entity whose only purpose is to make new loans for the purchase of homes and NOT purchase any old loans or allow refis with the money. This would create plenty of money for sales. I would even ease up on criteria and try to make it inexpensive.

2. Tax credit for anyone who buys in the next 18 months.

3. Allow bankruptcy judges to cramdown on principal residences. If lenders know that a judge can, they will have more motivation to work out loans with consumers.

4. A moratorium on credit reporting of derogatory credit reporting, except in cases of fraud, to bring consumers who lost homes back into the market to stimulate sales. Let them buy the type of house they paid 400k for now at 200k like the rest.

All of this will lead to hitting a bottom in real estate and start the slow recovery process. As for the old loans, well, all made a bad investment, its the American way to take your losses as well as profits. That should be left alone.

2008 Oct 23 09:36 AM

[nbm:]

Reduce the age requirements (50, instead of 62) and fees for reverse mortgages. People can re finance with the bank, and still live in their houses. It is not the total answer but partially helps out.

2008 Oct 23 11:39 AM

[rm:]

[“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.”]

It sickens me that the only real choice is between this knucklehead and a guy who'd give free rein to the Franks, Schumers and Waters of the world.

Home values will stablize themselves. There is no governmental solution to this issue.

There is no fair or equitable way to intervene.

If we take the flu medicine, the cancer will get worse.

2008 Oct 23 01:12 PM

[madasiwannabe:]

Why do we need more money for McCain's plan? We have a bill already.... It's called the housing bill. The majority of the bill focused on refinancing destressed homeowners into managable loans. There was 200 Billion allotted to accomplish it. For some reason Paulson and Lockhart think it's a slush fund for the GSE's.... READ THE BILL.

Another point, if the GSE's needed the money so bad, why haven't they used it? Probably because they didn't need it in the first place. Paulson doesn't want to help the homeowners, he want to help his friends on Wall St. He wants the GSE's to buy loans from the banks so that no one has to pay out for the swaps. Biggest winner: Goldman Sachs.

I won't even get into how AIG's bailout saved GS 20 Billion in Swap payouts and when LEH was allowed to fail, GS also made Billions. Funny how GS is always on the right side of Paulson's decisions.

Please go find and report the whole story on this. The public deserves to hear the truth.

2008 Oct 23 09:33 PM

[macanic:]

The Ant and the Grasshopper

OLD VERSION: The ant works hard in the withering heat all summer long,
building his house and laying up supplies for the winter.

The grasshopper thinks the ant is a fool and laughs and dances and plays
the summer away. Come winter, the ant is warm and well fed.

The grasshopper has no food or shelter, so he dies out in the cold.

MORAL OF THE STORY: Be responsible for yourself!

---------------------- ---------------------

Obama, Nancy and Reid Version VERSION:

The ant works hard in the withering heat all summer long, building his
house and laying up supplies for the winter.

The grasshopper thinks the ant is a fool and laughs and dances and plays
the summer away.

Come winter, the shivering grasshopper calls a press conference and
demands to know why the ant should be allowed to be warm and well fed
while others are cold and starving.

CBS, NBC, PBS, CNN, and ABC show up to provide pictures of the shivering
grasshopper next to a video of the ant in his comfortable home with a
table filled with food. America is stunned by the sharp contrast.

How can this be, that in a country of such wealth, this poor grasshopper
is allowed to suffer so?

Kermit the Frog appears on Oprah with the grasshopper, and everybody
cries when they sing, 'It's Not Easy Being Green.'

Jesse Jackson stages a demonstration in front of the ant's house where
the news stations film the group singing, 'We shall overcome.' Jesse
then has the group kneel down to pray to God for the grasshopper's sake.

Nancy Pelosi & John Kerry exclaim in an interview with Larry King that
the ant has gotten rich off the back of the grasshopper, and both call
for an immediate tax hike on the ant to make him pay his fair share.

Finally, the EEOC drafts the Economic Equity & Anti-Grasshopper Act
retroactive to the beginning of the summer.

The ant is fined for failing to hire a proportionate number of green
bugs and, having nothing left to pay his retroactive taxes, his home is
confiscated by the government.

Hillary gets her old law firm to represent the grasshopper in a
defamation suit against the ant, and the case is tried before a panel of
federal judges that Bill Clinton appointed from a list of single-parent
welfare recipients.

The ant loses the case.

The story ends as we see the grasshopper finishing up the last bits of
the ant's food while the government house he is in, which just happens
to be the ant's old house, crumbles around him because he doesn't
maintain it.

The ant has disappeared in the snow.

The grasshopper is found dead in a drug related incident and the house,
now abandoned, is taken over by a gang of spiders who terrorize the once
peaceful neighborhood.

MORAL OF THE STORY: Be careful how you vote in 2008

2008 Oct 23 10:55 PM

[Lynn:]

Macanic, Great story!

2008 Oct 24 04:26 PM

[joethelender:]

While all of these ideas are interesting, there is no way you can have a blanket policy for the country to bail out homeowners. The banks are not at fault for the foreclosures, the economy is. Income has been going down in comparison to cost of housing. Now that the bubble has burst the government should have created by now an emergency insurance fund, like FEMA to help people that qualify. Maybe now is the time to start. Texas has not been hard hit by this crisis, and several other places that have sound lending practices. Not paying your house payment because the value has gone down is a bad idea, giving it back to the real owner (the bank) is. The banks going to auction it off or sell it on the open market to the highest approved bidder. The person that chooses to hurt their credit is not going to get a good home loan. This idea of letting people buyback their own home after they walked away from the loan is not going to happen unless they pay cash. Everyone would jump on that bandwagon and make the problem 100 times worse. Lets come up with some more ideas that make sense.

2008 Nov 06 06:04 PM