August 26, 2010
By John Lott
Published August 24, 2010
Americans may be extremely upset about Wall Street bailouts, but President Obama isn’t listening. Come September 7, President Obama will have Wall Street investment banks lining up for another huge bailout. But such a bailout will do little to stimulate the housing market and offset the latest 27.2 percent plunge in existing home sales.
The Federal Housing Administration (FHA) will offer financial institutions holding mortgages worth more than the value of the houses, so-called “underwater” mortgages, a guarantee on 90 percent of the mortgage value if the institution will write-off 10 percent of the mortgage. These risky mortgages have been bought up by Wall Street investment banks at may be 30, 40 or 50 cents on the dollar. The government now says that if the holder takes 10 percent off the mortgage, the government will guarantee 90 percent of the mortgage. So they may have bought a $400,000 mortgage for $200,000. If the mortgage holder agrees to write-off $40,000, the government will guarantee the mortgage for $360,000.
What was once a mortgage worth $200,000 to the investment bank is now worth $360,000 that they can turn around and sell for that tomorrow. And now, let’s do the math. You, the taxpayer, have just given these Wall Street investment firms $160,000!
The Department of Housing and Urban Development estimates that up to 1.5 million home mortgages will be bailed out. The write-offs are estimated to cost up to $35 billion (averaging $23,500 per home), and the benefits to the mortgage holders will likely be much larger, with taxpayers being on the hook to pick up the defaults.
And, as you can see, it is really the “greedy” Republicans who Mr. Obama frequently assures us are in the pockets of Wall Street. There is no reason for government to be giving a single dime to these Wall Street financial institutions. The mortgages that they bought reflect the risk associated with them. The original mortgage holders have long ago absorbed the losses from these bad loans.
The Obama program is also going to create massive unfair wealth transfers across Americans. Why is the government giving at least a 10 percent write-off to people whose homes are underwater? Marking down a $400,000 mortgage by 10% is $40,000. That is a lot of money. Why do people in California, Nevada and Florida get these pay-offs? But not people in Texas whose home values didn’t fall that much? Why do people who bought houses recently get all this money, but not people who have lived in the same house for 15 years and whose houses are not underwater?
Many people receiving this money are the very ones who the government forced banks to lend money to that lead to all the financial problems. Poor minorities who couldn’t afford to put down money on their homes, who took out a mortgage equal to 100 percent of the value of their home, are the ones most likely to have their homes underwater.
To make matters even worse, the many responsible homeowners are being excluded from these windfalls.
Suppose that you couldn’t afford your home and you didn’t want to default, so you did the responsible thing and rented out the home and moved into a smaller apartment. Guess what. You aren’t eligible for this write-off.
Another billion dollars has been set aside for unemployed homeowners who stay in their homes, not unemployed homeowners who tried to cut back on expenses by renting out the houses that they couldn’t afford.
If you want to stimulate housing, the key is to increase the future returns to owning a home, not just to hand out windfall gains to those who have made decisions in the past. Some of the money will to those who made unwise decisions in the past, but much more of the money will go to investment bankers who bought the mortgages that they hold at a discount. In any case, government policies caused housing to be over built in the past, and Washington should concentrate on making investment in general more profitable by letting people keep more of the money that they make, not in helping what industry by taking money from other places in the economy.
Americans have a plea for our president and the Democrats in Congress: Stop these massive redistributions of wealth. Stop the Washington bailout out of the auto industry and teaches unions, of states that haven’t controlled spending, and people in certain other favored industries. — The country’s debt keeps soaring as these redistributions keep getting bigger. How these favored groups get chose for government largesse seems solely based on whether they are part of Democrats’ constituencies. That isn’t a good enough reason for them to reap these massive windfalls.
John R. Lott, Jr. is a FoxNews.com contributor. He is an economist and author of “More Guns, Less Crime.”(University of Chicago Press, 2010), the third edition of which was published in May.