Obama Punishes Responsible Parties

This is a headline that I have long been waiting to see, because without accountability at every level, a society is a weak shadow of what it can and should be.

Unfortunately, the responsible parties I am referring to have never committed any crime, nor do they deserve to be punished.

I am among them.    Perhaps you are as well.

If you did not buy more house than you could afford, or never issued a loan to a party that could (obviously and predictably) not repay that loan, then you just got punished.

Here’s the data:

Obama Plans $75 Billion Outlay to Fight Foreclosures

Published: February 18, 2009

Seeking to stabilize the foundering housing market, President Obama is offering a plan to help as many as nine million families refinance their mortgages or avoid foreclosure, according to a summary released by the White House on Wednesday morning.

The plan, which is more ambitious than expected, would spend $75 billion to help keep as many as four million families in their homes, and would help as many as five million more refinance their mortgages to take advantage of lower interest rates.

Okay, there are so many beliefs and opinions wrapped into those opening salvos that I feel I must step in and expose them. One thing that I do in conference, and in the Crash Course, is distinguish between facts, opinions, and beliefs. This article, which comes from the front page of the New York Times will be absorbed by many as “fact.” Let’s be more careful.

1. “Seeking to stabilize the foundering housing market…” is a statement of opinion, not fact. While this sounds laudable and worthy as a goal, there can be no doubt that any plan that funnels money to homeowners is really going to end up in mortgage companies and banks, and very rapidly at that. So it could just as easily be framed as, “Seeking to stabilize the foundering mortgage and banking businesses that made extremely foolish loans…”. The difference between the way that the NYT framed it and the way that I did does not reflect a difference over facts, only opinion.
2. Saying, “…help as many as nine million families refinance their mortgages or avoid foreclosure…” is also presenting something as fact that does not even stand up to the slightest scrutiny. The $75 billion price tag divided by 9 million gives us a value of $8,333.33 for each of the nine million homes. There is simply no possible way that $8,333 each is going to make the difference between 9 million people keeping or losing their homes. It might if that was applied to this year’s balance gap, but over the life of the loan? No possible way.

But it’s not just the NYT that is mis-representing the issue. Obama said:

“The plan not only helps responsible homeowners on the verge of defaulting, but prevents neighborhoods and communities from being pulled over the edge too. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

He can wrap this with as many words as he wants but the plain facts are that only people in trouble with their mortgages get any handouts here. People who are not delinquent, or who are perhaps renting, only get the opportunity to pay for the mistakes of others.

Politically, this is a great plan. Good sound bites and it looks like action. Also, roughly 9 million votes are secured for the next election. Two thumbs up in this regard.

Economically, it stinks. This is throwing good money after bad, and, worse, by seeking to “shore up sinking house prices,” it betrays a complete ignorance of the actual root of the problem. Blaming sinking housing prices for the fix we are in is equivalent to blaming the car for the drunk driving wreck. If Obama were to craft a similar program for drunk drivers, it would include new cars for any that happened to wreck their own. The problem is not that house prices are sinking, it’s that they got too high to sustain. It was a bubble for goodness sake! That’s the very definition of a bubble. Any and all attempts to “shore up” bubble prices is a doomed effort that will assuredly squander both additional capital and valuable time.

Morally, it is a complete disaster. The clear implication here for every sentient person is that it pays to be reckless. Moral hazard is written all over this one. I can easily envision millions of people arriving at the same conclusion:  “I need to stop paying my mortgage right away so that I qualify for a handout!” It’s entirely sensible, and I would seriously consider this option if I had a mortgage and little or no equity in the house. As it is, I am a prudent renter who saw the bubble for what it was and will now pay a double price for having been so prescient. First, I will have to endure government-subsidized house prices set above market rates, and I will have to pay for the reckless actions of house owners and lenders who behaved recklessly. This is no way to set an example and is not how I wish my country to be run.

Taken together, these actions represent a near-total lack of vision and leadership.

Here’s one example that should illustrate exactly why this plan is DOA.

Feb. 18 (Bloomberg) -- It has taken Susan Erb just three years to see the value of her Merced, California, home plunge by more than half to $350,000. Next month, her mortgage payment jumps 20 percent to $3,321 and she knows she can’t afford it. Her bank won’t rework the loan unless she stops paying altogether.

Think about a house underwater by $350,000. Think about a monthly payment of $3,321. Now join these to the total $8,333 offered by the Obama plan. How far will that $8,333 go? About 8 months of payments is my assessment and then the house will still be more than a third of a million underwater.

The reason I sometimes despair at ever finding our way equitably through this mess is captured by this quote (from same link as above):

Rina Serrano, 35, an after-school program supervisor for the Merced County Office of Education, may lose her job next year due to budget cuts. The value of her house, built by Calabasas, California-based Ryland Group Inc. in the Bellevue Ranch development, fell by at least a third since she purchased it in 2007. Her husband’s cabinetmaking business is down by half.

“Nobody has given us any options, but my feeling is there should be some assistance,” said Serrano, 35, a mother of four. The couple took out a 30-year fixed loan and aren’t behind on payments but they are underwater by about $70,000.

Here’s a person who has not yet missed a payment, but whose house is worth less than her mortgage, who wants “some assistance.” Where you might think, “Be more careful next time!” there are many who simply want to be relieved of the consequences of their poor decisions and too many politicans who are eager to try.

And who can blame them? I too would like to have every bad decision I ever made paid for by someone else but I am also mature enough to know that this is not a realistic way to approach life.

So there it is. If you have been responsible, you have just been punished. And you know what? Nobody can possibly blame you for deciding that being responsible is for suckers.

It’s not a stretch to imagine that a few folks will even come to the conclusion that hard work and prudence are no longer the core values of our country.

Does the current administration really want to foster this sort of a mindset right at the outset of a nasty recession/depression?

It would seem that the answer is “yes.”