Obama’s Futile Attempts at Foreclosure Avoidance

by John Berlau on February 18, 2009 · 10 comments

in Bailout Watch, Features, Labor, Mobility, Politics as Usual, Zeitgeist

The new $75 billion foreclosure avoidance plan to be unveiled today by President Obama, from initial reports, continues the misguided efforts of the Bush administration and Congress to “keep people in their homes” at all costs. Such policies only end up disserving taxpayers, the economy, and frequently troubled borrowers themselves.

There are many reasons for foreclosures, from borrowers getting into a house than they couldn’t afford to a job loss or other factors that cause loss of a family’s income. Whatever the cause of the homeowners’ troubles, the focus should not be primarily on keeping people in their homes, but on opportunities to improve their economic situation. If the government wants to spend $75 billion to help troubled homeowners, it would be better off giving a tax holiday to families subject to foreclosure, rather than attempts to stop the foreclosure from occurring that often have unintended consequences.

While all foreclosures are difficult, they are sometimes the least bad option for an individual borrower. They allow borrowers to walk away from both the home and the loan, at a cost to their credit rating, but not nearly as big a hit as they would take if they declared a personal bankruptcy.

Having borrowers continue to pay into a bad loan, even with reduced payments, takes away money they could be using to start over. Redefault rates from existing government-backed loan modification programs indicate that they are often ineffective. And in the case of borrowers facing job losses, staying in one’s home while being saddled with a mortgage can delay the necessary step of moving to an area with more job opportunities.

It would also be unfortunate if, as reports indicate, President Obama endorses legislation in Congress creating a bankruptcy “cramdown” or other efforts to abrogate mortgage contracts. Mortgage-backed securities frequently aren’t owned by banks, but by investors, and those investors include pensions and mutual funds that belong to middle-class families. The government’s forcing or encouraging the abrogation of mortgage contracts could cause a hit to middle-class retirement savings. And it could also further tighten credit and drive up borrowing costs for American businesses and consumers due to the possibility of contract abrogation in the future.

Democrats and Republicans should focus on the truly “progressive” goal of helping victims of the financial crisis improve their economic situation, rather than ambitious efforts to keep people in their homes that can often lead to negative consequences for taxpayers, mobility in the economy, and borrowers themselves.

peony February 20, 2009 at 2:16 am

There are a couple of problems with all the stimulus plans being brought to the table. The number one problem of course is the creation of money causing inflation and more debt. The other downfall is the fact that the money is being given away to things that are doomed to fail. If there is an urgency to create stimulus, against some's better judgement, than the very least the government can do is to regulate the spending of the money they have now created and are giving away.

I agree with the statistics on failed mortgages even after interventions of assistance, however, I do not agree that all mortgages are bad ones or that all people have went in over their heads. Take the unemployment rate into consideration. There are many, like me, who were perfectly capable of handling monthly house payments, had a good honest mortgage, are not in a situation of owing more than the value of the home and do not have multiple mortgages or home equity loans to pay back. They simply have lost jobs during the unemployment crisis, are forced to take lower paying jobs and will now struggle to make the house payment at their current monthly payment amount.

All will have the inclination to state that if their incomes have lowered than selling the house to live within their newly acquired means should be the choice, but in the current crisis, selling is not an option as houses just are not selling at the moment.

Although stimulus is the creation of new money to prop up a failing economy that most surely will fail in the long run, or fail worse due to the debt created by the stimulus itself, if we must accept the fact that theses bills are passing whether we want them to or not, the least we can demand is that they are being invested correctly.

I for one will call my mortgage company and request a lower house payment to accomodate my new income. Will my mortgage company even need federal money to do that for me? If so, than why? Is it simply to absorb the cost they potentially lose on interest?

Stimulus, if it is too exist at all, should be granted on a case by case basis. Enough investing into irresponsible banks and bad mortgages.

Comments on this entry are closed.

{ 3 trackbacks }

Previous post:

Next post: