Monday, November 30, 2009
Economist: “What Passes For Help To Homeowners In The Capitol Might Look More Like Handing Out Money To Banks Anywhere Else”
PhD economist Dean Baker makes an interesting point in a new essay:
The big talk in Washington these days is "helping homeowners". Unfortunately, what passes for help to homeowners in the capitol might look more like handing out money to banks anywhere else...
It is extremely unlikely that the vast majority of underwater homeowners will ever accumulate a penny in equity. Keeping them in their homes as owners means wasting thousands of dollars a year on excess housing costs only to be forced to arrange a short sale or face a foreclosure at some future point in time.
So, who benefits from "helping homeowners" in this story? Naturally the big beneficiaries are the banks. If the government pays for a mortgage modification where the homeowner is still paying more for the mortgage than they would for rent, then the bank gets a big gift from the government, but the homeowner is still coming out behind.
In some cases the government may pay enough to buy down principle that the homeowner is no longer underwater, but the bulk of this money is a gift to the bank, not the homeowner. If a homeowner is $100,000 underwater and the government pays the bank $50,000 to write the loan down to the current value of the house, then the bank has pocketed $50,000, while the homeowner is essentially left breaking even. This is very generous to the bank, but homeowners have nothing to show in this story.
President Obama has proposed putting up $70bn to help homeowners in this way. This help for homeowners is likely to end up as a larger subsidy to the banks than the rest of the troubled asset relief programme (Tarp). The reason is that the rest of the Tarp programme was a loan. The loans were at below market interest rates - thereby providing a subsidy to the banks - but most of the money is getting paid back.
The original batch of lending to banks was $250bn. Even if we assume an average interest rate subsidy of 10 percentage points (a very large subsidy), this still implies that the lending portion of Tarp only handed $25 billion to the banks, far less than the $70 billion that we are prepared to hand them under the guise of helping homeowners.
There are simple, low-cost ways to help homeowners who were victims of the housing bubble and lending sharks. The most obvious way would be to give homeowner the right to rent their home at the market price for the next decade. But this would mean hurting the banks rather than giving them taxpayer dollars, and we still don't talk about hurting banks in Washington DC.
Maybe that's why a professor of law advises that underwater homeowners walk away from their mortgages, saying that it is not immoral to do so, Congresswoman Kaptur advises her constituents facing foreclosure to demand that the original mortgage papers be produced, and portfolio manager and investment advisor Marshall Auerback argues that a debtor's revolt would be a good thing.