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Where do we draw the line on mortgage bailouts?

Is it OK to use taxpayer money to reduce the mortgage balances of struggling homeowners? Some states are considering this.

By Karen Datko Jun 1, 2010 11:13AM

This post comes from Marilyn Lewis of MSN Money.


Where do you think we should draw a line in the sand with these mortgage bailouts? Myself, I'm not a hardball libertarian make-your-bed-and-you-lie-in-it type of taxpayer; I do believe in government. I'm not a bleeding heart type, I tell myself, but I like to think I do have a heart.

It seems right to me that government should pave roads and hire teachers and cops. When life whumps people upside the head through no fault of their own, it seems like a decent thing to have a safety net that helps get them on their feet. Not a down cushion, mind you. Just a net, with big wide mesh.


But this business of failed mortgages just confounds me. Who should we help? And where does it stop? Case in point: Three states now are talking about using part of their share of a special federal bailout to pay down individuals' mortgages (subscription required), as The Wall Street Journal reports.

The feds cut a $1.5 billion check to help the five states hit worst by the mortgage debacle -- Arizona, California, Florida, Nevada and Michigan. Arizona, Florida and Michigan are looking at doing what the feds and banks won't: reduce the mortgage balance, not just the payments, on mortgages that are worth more than the homes, a group that includes, for example, about half of Arizona home loans. In the Arizona experiment, which would help only 3,000 homeowners, banks would knock up to $50,000 off the loan value and the state would match it.


The Journal explains:

Writing down loan balances for troubled borrowers is controversial. Banks and some policy makers have been hesitant to do so out of concern that it would encourage other borrowers to stop paying in order to get a similar deal. But Michael Trailor, executive director of the Arizona Department of Housing, said the state's proposal would target "responsible" borrowers and wouldn't extend aid to borrowers with multiple homes or those who refinanced and pulled cash out of their homes. "If you really want to stop foreclosures in Phoenix, you need to address the loan-to-value issue," he said.

There's a bunch of smart people who believe that the mortgage crisis won't go away until somehow the balances on these underwater mortgages get reduced to something like the value of the properties. Which is what Arizona is getting at.

Liz Pulliam Weston says the price tag for these mortgage balance reductions isn't so awful when you consider what foreclosures are costing the rest of us anyway: $365 billion in home equity wealth.


The question is, who pays? Congress considered (in the Emergency Economic Stabilization Act of 2008) but rejected an approach called "mortgage cram downs," which would have let bankruptcy judges force lenders to reduce loan balances in some cases where nothing else worked. (Here's background, in a 2009 story by Bloomberg News.)  


Generally, mortgage bankers, of course, would rather die (get a whiff at the Mortgage Bankers Association's Stop the Bankruptcy Cram Down Resource Center). But the pain may have gone on long enough, even for some banks: A recent Huffington Post piece says Bank of America is coming around to support cram downs.


My neighbor's loan

Still, there's something about the idea of the state paying off my neighbor's loan -- using $50,000 of taxpayer money to reduce the mortgage balances of people who made a bad investment in a hyped-up, risk-prone, over-inflated, crazed real estate market -- that I just find hard to take. Is this socialism? And if it is, is it a bad idea? Surely, something's got to change because:

  • The piecemeal, let's-take-nine-months-to-drop-your-interest-rate-a-smidgeon-and-string-out-the-length-of-your-mortgage (read "Mortgage bailouts: Who qualifies?"), Chinese-water-torture federal modification programs aren't working and probably are prolonging the problem.
  • Not only are these ineffective modifications not working but they're putting scads of taxpayer money in the pockets of lenders and servicers, the companies that collect mortgage payments and enforce foreclosures (often different arms of the mortgage-lending banks).

Wouldn't I rather see the money help consumers more directly? Yes. No. Maybe. I don't know what I'd really rather see.


It's clear that only government life support is driving the housing market's tenuous, wobbly recovery, such as it is.


The American Banker reported last week:

FHA's recovery has been driven by stable housing prices and higher-quality loans, but the government is largely funding the housing market (subscription required), the agency's commissioner told attendees of a Mortgage Bankers Association conference in New York.

Not to be confused with socialism

Meanwhile, the corporate sector, which screams bloody murder about government intervention into private enterprise, has lobbied successfully to get its hands in the public trough and come out with two back-to-back series of homebuyer tax credits last fall and this spring. True, consumers got goodies: First-time homeowners were rewarded for buying a home with tax credits of $8,000; veteran buyers could take $6,500 off their taxes.


But the big impact -- not to be confused with socialism, of course -- was that money went straight from the taxpayers' pockets to the banking, mortgage and real estate industries.


So, really, what's my objection to this latest plan? Am I jealous? If they get theirs, I want mine, too? And for what have I been restraining my stupid consumer impulses and making my payments on time if idiocy and prolificacy are rewarded (with subsidies and handouts) and playing by the rules is punished (with higher taxes)?


You tell me. Should we keep skidding down this slippery slope, throwing money at the trouble until something takes hold and works? Or do we draw a line on bailouts for individual homeowners?


What the heck do we do next?


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