Common sense missing in Obama bailout
By GLENN GARVIN
ggarvin@miamiherald.com
There's a reason that English is the most widely spoken language on the planet: It's the most highly adaptable, capable of evolving to meet new needs in the blink of an eye. For example: Just last year, offering mortgages at a cheaper-than-market teaser interest rate with little or no money down was known as 'predatory lending.' But conditions changed -- specifically, the party occupying the White House -- and now we call that style of lending ``national policy.'
The new definition was provided by Predator-in-Chief Barack Obama last week while making his daily announcement of a new bailout plan, this one for homeowners who took on mortgages they can't afford during banking's go-go days earlier this decade. Offering them cheaper new terms on their loans -- at taxpayer expense, of course -- will help us bolster 'those core values of common sense and responsibility, those are the values that have defined this nation,' Obama said.
Only churlish Language Nazis would quibble with those bold new definitions of common sense and responsibility, much less note the extraordinary resemblance between Obama's mortgage-lending practices and those of the reptilian bankers he denounced so often during his presidential campaign:
• Down payments? We don't need no stinking down payments! Just like the bankers, who lured customers with deals that required no money upfront (at the height of the mortgage boom in 2005, 43 percent of first-time buyers didn't put down a single penny), Obama's plan doesn't call for the traditional 20 percent down. Instead, homeowners will be allowed to borrow more than their houses are actually worth. Just a week ago, being upside down -- owing more on your loan than the market value of your house -- was considered economically debilitating; now it makes you a prime customer.
• Hey kid, wanna smoke some mortgage crack? The first rock is free! Through a combination of government subsidies and arm-twisting of banks, the Obama plan will slash interest rates -- in some cases, probably to less than 3 percent -- until a borrower's payments are no more than 31 percent of his gross income . . . for the first five years. Then the interest rate jumps to market levels. A week ago, that was known as an 'exploding adjustable-rate mortgage,' because so many of the people who took them got financially blown up.
To be perfectly fair, there's a big difference between Obama's ARMs and the ones the banks offered -- instead of the banks being on the hook when the hapless borrower goes delinquent on his payments, you will. Obama's plan calls for the government to spend $200 billon buying up these loans through its mortgage zombies, Fannie Mae and Freddie Mac. You may recall that Fannie and Freddie went broke in September because they held so many worthless mortgages and had to be propped up with $200 billion in taxpayer money. But what's another bailout among friends?
I hope Obama keeps his checkbook handy, because it's almost certain he'll be needing it again soon. We already know that trying to raise delinquent borrowers from the dead doesn't work, because banks have been trying like crazy to do it, with practically no success.
Contrary to what you see in old Frank Capra movies like It's a Wonderful Life, banks don't like to foreclose on homeowners. It's messy, expensive and time-consuming, and they almost always lose money when they re-sell the house. In 2007, when the mortgage crisis began, banks immediately began trying to keep their customers from defaulting, offering better interest rates, lower payments over a longer period, and sometimes even reducing the principals of loans.
Result: The government's own statistics show that, of the borrowers whose loans were adjusted in the first six months of 2008, half were delinquent again within six months. By eight months, the figure was up to 58 percent.
Obama, in announcing his mortgage program last week, argued that the defaults were brought on by rising unemployment. To some extent, that's certainly true, though it's hard to see how his new E-Z Payment Plan is going to help that problem -- surely the president isn't planning to give loans to people who are jobless?
No act of kindness
But the harsh truth is that most foreclosures are directed against people who should never have gotten loans in the first place. A study unveiled earlier this month by Federal Reserve economist Sean Chu and two University of Minnesota colleagues, Patrick Bajari and Minjung Park, shows that fully half the increase in defaults since 2006 is among borrowers with lousy credit scores who wouldn't have been eligible for mortgages before the credit binge began.
When people have too little salary and too much debt to pay for their homes, lending them more money is no act of kindness, either to them or the taxpayers who will foot the bill. It's more like waking up with a hangover and trying to cure it with a shot of Jack Daniel's -- you're just postponing the pain. And that's true no matter how many new pages you add to your dictionary. |
