Friday, February 20, 2009

Helping homeowners the least we can do


The "rant of the year" occurred yesterday and having seen it live, I wasn't that impressed.  Sure, I commiserate with him on the idea of bailing out homeowners who bought too much house. Why should anyone get government help for irresponsibile behavior?

We live in a different world today than we did 18 months ago.  Some of us may have realized that gobs of debt may not be beneficial to long term survival, but obviously the entire banking/ mortgage system did not agree.  The financial industry got a $700 billion bailout last fall in order to correct their over-levered existence, and now the over-levered homeowner will get a similar deal.

At least Santelli is consistent since he railed against the bank bailout last September with admirable aplumb.  I love his passion, but the problem with Santelli's hard line is that the status quo of massive delevering tends to hurt all the players in the economy without regard for fault and we live in a highly integrated society.  Bad decisions by bankers and regulators have led to bad outcomes for us all.

All these bailouts really do is provide a structure for a slow motion delevering process.  The bad banks like Citi and Bank of America are going out of business regardless, but the organized process has led to no massive run on the bank and the money markets were spared from breaking the buck last September.  The innocent bystander institutions like Morgan Stanley and Goldman and a host of regional banks who were not levered 30:1 will remain in business and will benefit in the long run through reduced competition.  These are not necessarily bad outcomes given the circumstances.

Now, we can see that certain homeowners are having trouble making their mortgage payments and much of this is through no fault of their own.  In recessions people lose their jobs or have their hours cut and mortgages can become onerous very quickly.  The guy working as the cook at the local restaurant may have his hours cut with a fall off in business or his wife may get laid off from the hair salon when customers eschew once monthly haircuts.  This economic downturn certainly was less the fault of these folks than Bank of America's CEO with his several million dollar bonus.  

I have little problem providing a mortgage assistance for families that are getting inundated during this hard time.  It's not about people like me, but it certainly could have been had I not been fortunate enough to come of age in the fat part of the business cycle.  My house may be paid off and I may have no debt, but that wasn't the case 20 years ago when I was in my 20's.  I sure would not want to be in that position in today's crappy job market.  

Obama's plan makes sense:

This program is only for "at-risk" borrowers who are struggling with mortgage payments above 38 percent of their income. Under the program, if the lender agrees to lower the interest rate or reduce principal to bring the payment to 38 percent of the borrower's income, the government will pay half of the additional cost to the lender to reduce the payment to 31 percent of the borrower's income.

Furthermore, the property must be an owner-occupied primary residence without a second mortgage or jumbo loan. The lender has to have skin in the game so the risk to the government is mitigated.

How many people this will help is unclear, but estimates are about 9 million.  Obviously provision is made not to reward speculators.  The alternative to such a plan would be to have families having to foreclose or sell their homes into the worst housing market in history because of a short term economic recession, which would be a shame since this could trigger an acceleration of the downward cycle in the housing market and the delay any recovery in the economy.

Is it fair?  Hell, no it's not fair.  But neither are the rich salaries of bank and mortgage executives or the lack of remorse from government officials and regulators who perpetrated the biggest Ponzi scheme in history.  Nothing about this is fair, but it's the least we can do for our fellow citizens and for ourselves to protect the value of our greatest houshold asset-- our houses.  And the cost would be minimal compared to the bank bailout.

So while I understand Santelli's angst and I recognize that it's consistent, I politely disagree with his outdated Ayn Rand worldview.  I joked earlier that mortgagees who get help from the government should be required to clean up the neighborhood in return for the largesse, and the irony is that my underemployed neighbor would likely agree wholeheartedly without even asking...  

Would Angelo Mozillo? 




1 comment:

Delilah said...

I think the central point is that we don't have the luxury of railing about who bought too much house and happen to be in need of help today. Without that help in an over-levered environment, the stability of the integrated financial system is at risk.