When I bought my home, I chose a mortgage that was within my means. That meant buying a little two-bedroom house, and using much of my life savings for a 40-percent downpayment, so that my mortgage interest rate would be lower, and my monthly payment would be manageable even on my modest salary as a think-tank employee. It turns out that people who behaved like me — saving up their money for a big downpayment and not buying more house than they could afford — are suckers, since the Obama administration is using their tax money to bail out people who made smaller downpayments relative to their home value (and thus have larger mortgages that exceed the value of their home in the current depressed real estate market).
The administration is busy writing down mortgage loans, but only for certain favored categories of people whose mortgages exceed the value of their homes. Even in depressed real estate markets, people who made downpayments as large as mine don’t have mortgages that exceed the value of their homes. So effectively, the administration is rewarding certain lucky people who either (a) didn’t save enough money to afford a large downpayment, or (b) bought more home than they could really afford, or (c) have lots of money, but chose not to use it for a large downpayment. The thriftiest people are generally being treated worse. This isn’t as enraging as the Obama administration’s past bailouts for real estate speculators and flippers, and deadbeats who had high-incomes and modest mortgage payments, but it is disturbing nonetheless.
As Kathleen Howley of Bloomberg News notes:
Fannie Mae (FNMA) and Freddie Mac will let some borrowers who kept up payments as their homes lost value erase their debts by giving up the properties, helping Americans escape underwater loans while adding to losses at the mortgage giants bailed out with $190 billion of taxpayer money.
Non-delinquent borrowers with illness, job changes or other reasons they need to move will become eligible in March to apply for a so-called deed-in-lieu transaction that erases the shortfall between a property’s value and the size of its mortgage. It follows a change in November that lets on-time borrowers sell properties for less than they owe, known as short sales, wiping out the remaining mortgage debt. Normally, the lenders could pursue people to recoup their losses.
“It’s an extraordinarily generous approach for companies still in debt to American taxpayers,” said Phillip Swagel, a professor at the University of Maryland’s School of Public Policy in College Park, Maryland. “We’re giving people an incentive to walk away, right when the housing market is starting to right itself.
The participation of Fannie and Freddie in the current bailouts will drive up the cost to taxpayers of bailing out these government-sponsored mortgage giants, which have cost more than $170 billion to bail out, and have not repaid one penny of their bailout, unlike the private banks, which repaid their bailouts. The tab for bailing out Fannie and Freddie could go much higher, if the government expands bailouts further. The Obama administration earlier lifted the $400 billion limit on bailouts for Fannie Mae and Freddie Mac, which also helped spawn the mortgage crisis, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation. In May 2010, the administration and its congressional allies blocked efforts to reform Fannie and Freddie.
Earlier, the Obama administration announced a $26 billion settlement with the big banks that effectively robs Peter to pay Paul, ripping off innocent mortgage investors to reduce the big banks’ costs of bailing out certain delinquent and underwater mortgage borrowers. The administration’s bailout proposals are based on voodoo economics, and will discourage the saving and investment that are central to the long-run health of the economy.