The Justice Department, state attorneys general, and the biggest banks have reached an agreement to provide at least $26 billion to delinquent mortgage borrowers and others, such as left-wing housing counseling groups similar to ACORN. But if you were financially responsible, you very likely won’t benefit from this settlement, but may actually be harmed by it. It only benefits a small fraction of people who were foreclosed upon, as well as some underwater borrowers, most of them delinquent, whose mortgages were serviced by certain banks. You likely won’t get any money or principal reduction under this settlement if you paid your mortgage on time, especially if you were thrifty enough to make a large down payment (which usually prevents you from ending up underwater on your mortgage unless there is a huge decline in housing values). Instead, you may suffer, because the settlement may lead to mortgage interest rates rising in the future. (Politicians’ desire for this settlement was based on voodoo economics).
One feature of the agreement is that some delinquent borrowers who are underwater will see their mortgage principal reduced. But the cost of these principal reductions may be borne heavily by innocent third parties, not just the banks: the banks only retained a fraction of the mortgages they originated, selling the rest to mortgage investors (including some pension funds). So the banks are going to write off mortgage principal that is not wholly theirs, but rather the property of third-party investors, raising serious contractual and property rights issues. The settlement contains provisions which reward the banks for cutting mortgage principal balances through a specified formula, creating a serious conflict of interest between the banks and the investors on whose behalf the banks service the loan.
One sign that this cost-shift is real is that the stock price of Bank of America, the bank that will reduce the largest number of mortgages under this settlement, actually went up today, even as most banks’ stock price went down, despite bad news on other legal fronts for Bank of America. Once this cost-shifting happens, mortgages will become a more risky, less attractive investment for Wall Street investors and pension funds in the future, and banks will get less money from investors for them at any given interest rate — which will lead to banks charging a higher interest rate to borrowers to offset the increased risk. AEI’s James Pethokoukis, a former Reuters financial reporter, discussed earlier how Obama’s proposed mass refinancing proposal might have a similar effect that would backfire on America’s borrowers and home purchasers and result in increased interest rates in the future.
So essentially, responsible people are being tapped once again to bail out the irresponsible. As The New York Times notes, “Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure.”
Curiously, while the government apparently wants to milk innocent third party investors to finance the settlement, government agencies and government-controlled mortgage giants are not chipping anything in yet. As USA Today notes, the settlement’s principal reductions “will not include any loans owned by mortgage giants Freddie Mac, Fannie Mae, or the Federal Housing Finance Administration.” This is in contrast to 2009, when the Obama administration made these government-sponsored mortgage giants run up $30 billion in losses bailing out even high-income mortgage borrowers. The Obama administration earlier lifted the $400 billion limit on bailouts for Fannie Mae and Freddie Mac, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation. The administration has spent $170 billion propping up these two government-backed mortgage giants, which helped spawn the financial crisis, and has given them competitive advantages over private enterprises.
Meanwhile, the Obama administration is forcing banks to make risky loans (in the name of “fair lending”), thus planting the seeds of a future financial crisis. The Justice Department is suing banks that refuse to do so, and forcing them both to award preferential loans based on race, and to cough up money in “settlements,” some of which goes to left-wing “community” groups that are allied with the Obama administration.
The Obama administration recently began a multibillion dollar bailout for speculators. Bloomberg News reported that the administration is vastly expanding aid for certain “delinquent homeowners,” paying banks up to 63 cents for every dollar in principal they write off for such homeowners, a tripling of what banks can currently get under the HAMP bailout program. Speculators will benefit, too: they don’t even have to live in a house to get its mortgage principal reduced: “Investors who rent out their properties would be eligible to refinance under the new rules.”