Throughout his presidential campaign, George W. Bush repeatedly proclaimed, “I am a Uniter, not a Divider”. Most Americans will agree that Bush did nothing to unite the country, but instead he successfully created a divide amongst political parties and cultures. President Barack Obama rode a wave of “unity” into Washington; however, in the matter of five weeks into his presidency, Obama is further dividing the country. Democrats dealt a crushing blow to Congressional Republicans when they rammed through a $790 Billion economic recovery package within 24-hours of issuing the bill, undoubtedly, Republicans will be cautious about crossing the aisle on legislation in the future. This past week, President Obama announced a plan that will further divide the nation – his Homeowner Affordability and Stability Plan.
Unquestionably, America needs a plan to address the ongoing crisis in housing. The economy begin to weaken in 2007 when the bubble that formed in the nation’s housing market burst and asset values collapsed, which led to pressure in the mortgage markets and eventually broader pressure in the credit markets. The Bush Administration responded initially with tax rebate checks to prop up consumer spending, Treasury and the Federal Reserve created a variety of plans to bailout the financial companies; next a plan was drafted to help distressed auto manufacturers; then President Obama created a long-term plan to reinvest capital into the country’s failing infrastructure (transportation, energy, and schools). Surprisingly, this is the first time our Federal Government introduced a viable plan to target where the crisis begin – housing.
In the beginning, most Americans were losing their houses because they were unable to refinance adjustable rate mortgages when the value of their homes dropped below what they owed. Now, many Americans are facing foreclosure because they lost their job and can no longer afford their mortgage – 6 million families. Vacant and foreclosed homes can devastate a community as it destabilizes the tax base and decrease surrounding property values by 5% – 10%. The continuous stream of empty homes hitting the marketplace cripples the homebuilding and retail industry and drives up unemployment.
Obama’s plan to refinance or modify mortgages for 7-9 million homeowners will reduce payments, prevent foreclosures, and stabilize neighborhoods and communities. There are provisions in the plan that prevent aid to “speculators” and “flippers”, and the plan requires families with total debt levels at 55% or more of income to enter a counseling program as a condition for a modification. Both measures will ensure that at-risk homeowners receive financial assistance while giving them an education on how to prevent this from happening in the future. For these reasons and several more, the argument can be made that Obama’s plan is good for all Americans.
Further review of the plan unveils a series of inconsistencies. For example, the plan will not help anyone with a jumbo mortgage, so if you owe $500,000 on your home, then you will not receive assistance. Many small business owners are struggling in this economy and several have a jumbo mortgage. Despite that small business contributes over 50% to GDP and creates over two-thirds of the jobs in America – no housing relief is available. Included in the plan are “incentives” for loan servicers and borrowers to keep paying their mortgage on time. As long as a borrower stays current on the loan, the loan servicer receives $1,000 annually for up to three years, and the borrower receives $1,000 annually for up to five years. Currently, 93% of all homeowners are paying on time, are there any rewards for them?
America is the richest country in the world and the envy of all developed economies. Routinely, we attract foreign capital to our marketplace, because our strict adherences to contracts provide foreign investors with security. Around 50% of mortgage-backed securities were sold to foreign investors. Allowing loan servicers and even bankruptcy judges to modify home mortgages will have a negative effect on the capital markets. In the future, investors will be more cautious about investing in the American housing market and lenders will place tighter controls on extending loans to those with a spotted credit history.
Obama’s plan sends the message that homeownership is a “right” and that the Federal Government will do whatever it takes to keep people in their homes whether they can afford them or not. Did Obama consider those homeowners that committed fraud when they lied on their mortgage applications – are they deserving of a bailout? I wonder if the administration considered the thousands of private investors and real estate developers that are building rental units all over the country in response to the nation’s housing crisis. Government intervention into the housing market will reduce demand for rental units and undermine a recovering multifamily sector that was ravaged during the housing boom. Furthermore, intervention will not allow home prices to return to a level of affordability, so consumers and the private sector can lead a recovery in housing.
The moral hazards of this plan are frightening. What should stop all of us from paying our mortgages to gain access to Obama’s bag of goodies? This plan at a price tag of $275 Billion will be financed by all Americans, but is largely unavailable to most taxpayers. The ideology that is being perpetuated by our elected leaders that all Americans deserve to own a home is not only incorrect, but dangerous. Every American, and in fact, every human-being “deserves” shelter, but it is not a “right” to own that shelter.
