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Wednesday, February 18, 2009

[roeoz] Obama Punishes Responsible Parties

Posted by AccGURU

Obama Punishes Responsible Parties


Thursday, February 19, 2009, 9:14 am, by cmartenson

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…", this 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 of 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 perhaps are 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 way 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 owner 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 lifted from the impact of their poor decisions.

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."