Wednesday, February 18, 2009

Obama's Mortgage Plan Could Destroy Middle Class Home Ownership

Barack Obama is trying to "stop the bleeding" when it comes to the number of people losing their homes by implementing a controversial mortgage program (called an "affordability" and "stability" plan). In the future, this plan could destroy home ownership for everyone except the extremely wealthy.

The plan is riddled with government in both money and intervention, but it doesn't stop there. The biggest problem with the plan may not be the dollars spent, but the demands placed on the mortgage market place. There is a section in the $75 billion dollar plan that provides coercive measures to lower the costs for those with mortgages that they are struggling to pay.

Some of these measures would have been described as "socialistic" just a few years ago, but are now considered fairly common in the bizarre political culture we live in today. These include:

  • A Shared Effort to Reduce Monthly Payments. This would be a "joint effort" between government and mortgage companies to lower monthly costs.

  • "Pay for Success." This essentially subsidizes mortgage companies at a rate of up to $1,000 per lender to keep people in their homes.

  • Incentives to Help Borrowers Stay Current. This is the borrower's cousin to the program immediately above. With this program, the government will pay borrowers $1,000 a year for staying current.

  • Reaching Borrowers Early. This pays lenders to modify distressed borrowers before they go into foreclosure.

  • Home Price Decline Reserve Payments. This would essentially be an insurance policy to help protect against home values declining.

For a person who believes in free enterprise like I do, the above policies are offensive enough. But at least these measures largely compensate mortgage companies for some loss of income and inconvenience. There is one provision, that comes with very little explanation, that could make middle class home ownership a thing of the past. In the words of the plan itself, this provision will "allow judicial modifications of home mortgages during bankruptcy for borrowers who have run out of options."

This provision sounds innocent enough and, unlike many of the other measures, has little direct cost to taxpayers. In the long term, however, this simple provision could devastate middle class home lending because you will have judges arbitrarily deciding whether all other options have "run out," lowering interest rates at will, or forcing decreased payments on lenders. These decisions will be done by a person who has no vested interest in the process and often no knowledge about the dynamics of the lending process. As a result of this bill, many lenders will likely increase the already high standards for home ownership or simply make home ownership only accessible to the very rich. This is contrary to the objectives of Barack Obama, who has built his career on increasing home ownership to every income group, but is the typical results of the latent effects to fundamentally bad public policy.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

Labels: , , , ,


Post a Comment

<< Home