Foreclosure

Obama Administration Tries to Rip-Off Retirees in New Mortgage Bailout

by Hans Bader on March 10, 2011

in Bailout Watch, Economy, Politics as Usual, Zeitgeist

The Obama administration is now working with state attorney generals to rip off pension funds to bail out mortgage borrowers who don’t even need help. Pension funds that millions of Americans rely on for their retirement will suffer. Bank shareholders will also suffer. I  explain how and why in a commentary at The Washington Examiner website. The government is trying to get mortgage servicers to write off portions of loans that are owned by other people or institutions — like the pension funds that millions depend on. That undermines property rights. Last fall, intellectuals with ties to the Obama administration proposed a much larger, but conceptually similar, bailout that could cost taxpayers a trillion dollars, the idea being to temporarily increase consumer spending through the next election.

Economic Illiteracy and Stopping Foreclosures

by Alex Schibuola on October 11, 2010 · 1 comment

in Bailout Watch, Economy

Express, a publication of The Washington Post, notes that as a result of a stoppage in mortgage foreclosures: “Prices might stabilize because so many homes are penned up.”

The underlying logic is that:

(1) If there are fewer foreclosures today, then the supply of houses on the market will be reduced.

(2) If supply is reduced, prices will go up (or “stabilize,” i.e., not go down).

Their logic is sound, but they must follow through with the analysis. Yes, the foreclosures are delayed. But we know that they are coming eventually. Therefore in, say a year, we expect prices will decrease once the foreclosure process is re-initiated because those houses then show up on the market.

They [Express] imply that expected future prices are lower than today’s current prices. This won’t do however.

If sellers expect that prices will fall in the future, they will want to sell at today’s relatively higher prices. As a result more people start selling now which increases today’s supply and this brings down today’s prices. This will continue until future prices are equated with today’s prices. Why? Because if expected future prices are low relative to today’s prices more people would like to sell to capture the relatively higher selling prices of today.

A similar effect occurs on the demand side of the market: some potential home buyers expecting prices to fall in a year will wait to buy, until houses become relatively cheaper. Fewer home buyers today mean less demand today, and this entails lower prices today.

The main idea here is that expectations of future prices held by sellers and buyers affects today’s prices, such that future prices and today’s prices move to equality. In this case it means prices go down. The unfortunate take away from this is that the healing period is far from over.

Obama’s Recent $75 Billion Mortgage Bailout Fails: Harmful to Economy, Housing, and Construction, Say Economists and Real Estate Experts

by Hans Bader on January 4, 2010 · 2 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Legal, Politics as Usual, Regulation

Economists and real estate experts are saying that a $75 billion mortgage bailout program designed by the Obama administration has backfired and harmed the housing market, reports The New York Times:

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good. . .experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

That “’has the effect of lengthening the crisis,’ said Kevin Katari, managing member of Watershed Asset Management. . . ’We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway,’ and ‘banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books,’” delaying a recovery in the housing market and the construction industry.

The failed mortgage bailout is reminiscent of the government’s attempt to reduce burdens on irresponsible credit card borrowers, through a new law, the CARD Act of 2009, that backfired and resulted in the return of annual fees, bizarre interest rate hikes for some responsible borrowers, and the elimination of many cash back and rewards programs.

Earlier, the government pushed through billions more in other mortgage bailouts, to bail out even reckless high-income borrowers, and forced financial institutions the government took over in the name of fiscal responsibility, like Freddie Mac, to run up billions in losses bailing out irresponsible borrowers.

Banks will now be pressured to make even more risky loans. The House has approved Obama’s proposal to create the so-called Consumer Financial Protection Agency. Government pressure on banks to make loans in economically-depressed neighborhoods was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s disturbing proposal would empower the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.  The Community Reinvestment Act was a key contributor to the financial crisis.

The mortgage crisis was also caused by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and by federal affordable-housing mandates. But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Worse, the Obama Administration lifted the $400 billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.

Obama’s financial-regulation plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort pay-offs from banks.

90 Percent Tax Rate Proposed

by Hans Bader on March 7, 2009 · 7 comments

in Bailout Watch, Economy, Politics as Usual, Stimulus to Nowhere

Congressman Jerry McNerney (D-California) has advocated raising marginal tax rates to 90 percent. Such a tax increase on the wealthy would be necessary, but not sufficient, to pay for the vast spending increases proposed by the Obama Administration, if it is to keep its promise not to raise taxes on those making less than $250,000 per year. Indeed, it would not raise enough money, since there simply are not enough wealthy people to pay for all the proposed spending.

In the National Journal, the disillusioned centrist Stuart Taylor, who once praised Obama, notes that Obama’s budget projections are based on bogus accounting, and would result in mushrooming deficits as far as the eye can see unless taxes are raised radically. Obama, he writes, “has been deceptive in basing his deficit projections on phantom expenditure cuts and wildly optimistic revenue estimates.” Moreover,

“The numbers don’t add up — and still won’t if and when, as seems almost certain, Obama ratchets up his so-far-fairly-modest new taxes on the top 2 percent. ‘A tax policy that confiscated 100 percent of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue,’ according to a February 27 editorial in The Wall Street Journal. ‘That’s less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable ‘dime’ of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.’

As for the budget’s $2 trillion in projected net “savings,” Obama’s budget director, Peter Orszag, admitted in testimony on Tuesday under questioning by Rep. Paul Ryan, R-Wis., that $1.6 trillion comes from phantom cuts of the money that would be needed to sustain the troop surge in Iraq for another decade — money that nobody ever intended to spend.

Other supposed savings — especially from Medicare — seem unlikely to materialize absent benefit cuts, which Obama has not proposed. And the cost of any health care legislation — to be drafted largely by a Congress that is allergic to the kind of cost-cutting necessary to make universal care sustainable — is likely to be two or three times the $634 billion over 10 years that Obama has budgeted.”

Ironically, even as Obama advocates raising taxes on families making more than $250,000 per year, he bails out irrresponsible, high-income mortgage borrowers, even if their current mortgage payments are not high. His $75 billion-plus mortgage bailout, announced last week, reduces borrowers’ mortgages even if they have big homes (covering mortgages up to $729,750) — and even if their mortgage payment is not high (they can qualify if their mortgage, plus property taxes and insurance, amounts to as little as 32 percent of income — less than many responsible homeowners have long paid on their mortgage).

Obama’s bailouts reward the irresponsible rich, even as his proposed tax increases would punish thrifty high-income households by increasing their capital gains and income taxes, and raise taxes on the small businesses that create most of America’s jobs. Bush launched a war on terror. Obama has launched a war on thrift and American investors.

Since Obama signed the bloated $800 billion stimulus package into law, the stock market, a leading economic indicator, has plunged like a stone. (The Congressional Budget Office predicts the “stimulus” will actually shrink the economy in the long-run). Investors are spooked, as Stanford University economist Michael Boskin notes in his Wall Street Journal column, “Obama’s Radicalism Is Killing the Dow.” Another commentator notes, “In less than 50 days, Obama has spent more than three times the cost of the entire Iraq War so far. This year, he will more than triple the largest deficit of the Bush era.”

Bailing Out the Reckless Rich, Harming Our Economy

by Hans Bader on March 5, 2009 · 2 comments

in Bailout Watch, Politics as Usual, Stimulus to Nowhere

Well-to-do people will receive an unnecessary mortgage bailout, under a new federal program that will cut their payments to just 31 percent of their income — a ridiculously low level lower than many thrifty homeowners have made for years. Taxpayers and the economy will suffer in the long-run. And people with modest incomes will end up subsidizing the more fortunate.

Yesterday, the Obama Administration announced a “mortgage bailout to aid 1 in 9 U.S. Homeowners,” according to today’s Wall Street Journal. The cost is estimated by the Administration at $75 billion, and by independent experts at much more than that.

“Homeowners with loans as large as $729,750 could see their interest rates temporarily cut to as low as 2 percent under the program,” and perhaps have their mortgage balances reduced, according to today’s Washington Post. Thus, American taxpayers — including low-income renters — will pay to subsidize people with high incomes who bought big homes with values approaching a million dollars.

As the Washington Post notes, “Under the program, lenders are encouraged to lower homeowners’ payments to 31 percent of their income. That could come from lowering the interest rate to as little as 2 percent . . .Lenders could also lower the principal owed by the borrower.”

This is simply insane. Paying more than 31 percent of your income on a mortgage is not a hardship. I paid more than that when I first purchased my home. In wealthy, high-living cost areas like San Francisco, people have long paid more than that, well before the current financial crisis. And in densely-populated nations like Japan, people have often paid more than that. Many beneficiaries of this bailout would never have defaulted, and the program’s requirement that they submit an “affidavit of hardship” is virtually meaningless, given the program’s low threshold for “hardship.” Even if they did face foreclosure, they could still find a place to rent, as most people who have been foreclosed on do.

Why on Earth should someone with a huge $700,000 home be able to reduce their payments on that home to 31 percent of their income, at taxpayer expense, when they could, with a little “hardship” — say, giving up an automobile not needed for work, or no longer eating out at restaurants — afford their mortgage payments on the big house they live in?

Yesterday, I went to the Washington Post web site, and used its interactive function which tells you whether you qualify for a bailout. I entered my mortgage as a percent of my income at the time I purchased my home, and it told me that I “probably” qualified for a bailout. (Today, my income is too high, but not at the time I purchased the home). But I have never needed a bailout. By being thrifty over the years — like avoiding expensive cars and travel, eating cheap foods, and not eating out — I have always been able to afford to pay more than 31 percent of my income on housing.

Before I and my wife bought our small home, we were outbid for a bigger, better home by another couple who made virtually no downpayment and ended up with big mortgage payments. Unless their income has increased substantially since then, they will likely be eligible for a bailout by claiming “hardship” — even though their income is much higher than the average American household.

Only someone indifferent to what housing actually costs — like a policymaker with political rather than economic goals in mind (like buying votes in states with high housing costs) — could have designed this plan. (I have some clue about what housing costs, since I used to produce cost and wage data for the federal government, and since I have a degree in economics as well as in law.).

Bailouts and stimulus plans don’t increase the size of the economy in the long run. They actually shrink the economy in the long run, while exploding government debt, as Japan found to its chagrin in the 1990s. But politicians like them because they do slightly increase the economy’s size in the short run — like by the next election. Bailouts provide short-term gain but long-term pain.

Even the Congressional Budget Office, controlled by the very body that enacted the $800 billion stimulus package, admits that the $800 billion stimulus package signed by President Obama will slightly reduce the economy’s size in the long-run. How will it shrink the economy? By increasing the national debt, which drives up interest payments on the debt, which in turn crowds out private investment. This mortgage bailout plan will similarly reduce the size of the economy over the long-run, since it will be financed by government borrowing that increases the size of the national debt.

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.

Investing in Communal Failure: The Current Economic Crisis as a Result of Regulation

by Michelle Minton on September 29, 2008 · 11 comments

in Bailout Watch, Economy, Precaution & Risk

Unfettered greed is the suspect many point at to explain the current economic crisis. To some extent, they are right, but it isn’t irrational greed on the part of bank managers or fat cat CEOs. It is the unwieldy bank regulations that forced the entire industry to walk the proverbial plank and then blame it for drowning.

Critics have alternately claimed that over-regulation and under-regulation are the causes for the current crisis. I believe one specific regulation, the Community Reinvestment Act (CRA), should shoulder a lot of the blame for creating an environment where a lending institution’s short-term survival hinged on it making the decisions that in the long-term would likely cause its demise.

As I noted in my paper The Community Reinvestment Act’s Harmful Legacy, one of the effects of the CRA was the creation of a weapon that has been effectively utilized to extort money from lenders. When lending institutions wish to open a new branch, expand, or merge, they must apply for permission from one of the four governing bodies (Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision). Their request can be postponed or outright denied if any community group files a CRA protest. Lending institutions can of course fight these protests, but CRA investigations can take months and cost large sums of money.

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