Well-to-do people will receive an unnecessary mortgage bailout, under a new federal program that will cut their payments to just 31 percent of their income — a ridiculously low level lower than many thrifty homeowners have made for years. Taxpayers and the economy will suffer in the long-run. And people with modest incomes will end up subsidizing the more fortunate.
Yesterday, the Obama Administration announced a “mortgage bailout to aid 1 in 9 U.S. Homeowners,” according to today’s Wall Street Journal. The cost is estimated by the Administration at $75 billion, and by independent experts at much more than that.
“Homeowners with loans as large as $729,750 could see their interest rates temporarily cut to as low as 2 percent under the program,” and perhaps have their mortgage balances reduced, according to today’s Washington Post. Thus, American taxpayers — including low-income renters — will pay to subsidize people with high incomes who bought big homes with values approaching a million dollars.
As the Washington Post notes, “Under the program, lenders are encouraged to lower homeowners’ payments to 31 percent of their income. That could come from lowering the interest rate to as little as 2 percent . . .Lenders could also lower the principal owed by the borrower.”
This is simply insane. Paying more than 31 percent of your income on a mortgage is not a hardship. I paid more than that when I first purchased my home. In wealthy, high-living cost areas like San Francisco, people have long paid more than that, well before the current financial crisis. And in densely-populated nations like Japan, people have often paid more than that. Many beneficiaries of this bailout would never have defaulted, and the program’s requirement that they submit an “affidavit of hardship” is virtually meaningless, given the program’s low threshold for “hardship.” Even if they did face foreclosure, they could still find a place to rent, as most people who have been foreclosed on do.
Why on Earth should someone with a huge $700,000 home be able to reduce their payments on that home to 31 percent of their income, at taxpayer expense, when they could, with a little “hardship” — say, giving up an automobile not needed for work, or no longer eating out at restaurants — afford their mortgage payments on the big house they live in?
Yesterday, I went to the Washington Post web site, and used its interactive function which tells you whether you qualify for a bailout. I entered my mortgage as a percent of my income at the time I purchased my home, and it told me that I “probably” qualified for a bailout. (Today, my income is too high, but not at the time I purchased the home). But I have never needed a bailout. By being thrifty over the years — like avoiding expensive cars and travel, eating cheap foods, and not eating out — I have always been able to afford to pay more than 31 percent of my income on housing.
Before I and my wife bought our small home, we were outbid for a bigger, better home by another couple who made virtually no downpayment and ended up with big mortgage payments. Unless their income has increased substantially since then, they will likely be eligible for a bailout by claiming “hardship” — even though their income is much higher than the average American household.
Only someone indifferent to what housing actually costs — like a policymaker with political rather than economic goals in mind (like buying votes in states with high housing costs) — could have designed this plan. (I have some clue about what housing costs, since I used to produce cost and wage data for the federal government, and since I have a degree in economics as well as in law.).
Bailouts and stimulus plans don’t increase the size of the economy in the long run. They actually shrink the economy in the long run, while exploding government debt, as Japan found to its chagrin in the 1990s. But politicians like them because they do slightly increase the economy’s size in the short run — like by the next election. Bailouts provide short-term gain but long-term pain.
Even the Congressional Budget Office, controlled by the very body that enacted the $800 billion stimulus package, admits that the $800 billion stimulus package signed by President Obama will slightly reduce the economy’s size in the long-run. How will it shrink the economy? By increasing the national debt, which drives up interest payments on the debt, which in turn crowds out private investment. This mortgage bailout plan will similarly reduce the size of the economy over the long-run, since it will be financed by government borrowing that increases the size of the national debt.