Contact: Cord Blomquist 202-615-0600
Obama Foreclosure Plan Hurts Middle-Class Investors, Retirees
Washington, D.C. , March 4, 2009—A financial policy expert predicts President Obama's $275 billion "foreclosure avoidance" plan will actually harm many homeowners, investors, taxpayers and economic recovery.
Statement by John Berlau, Director of CEI's Center for Investors and Entrepreneurs:
Based on initial reports of President Obama's mortgage plan unveiled today, my initial concerns have been confirmed.
This plan hurts prudent middle-class families, not just as taxpayers, but as savers and investors. Many of the mortgage-backed securities affected by the plan are held not by banks, but pensions and mutual funds that serve middle-income retirement savers. These working families would take the actual losses, yet it's the banks who are "servicing" the loan that would get the incentive payments from the government. In a sense, combined with the the bankruptcy "cramdown" legislation before Congress that would let judges abrogate mortgage contracts, the Obama plan is cajoling and paying banks to play fast and loose with their contracts to mortgage holders and rip off middle-class savers and investors.
The provisions regarding Fannie Mae and Freddie Mac refinancing of loans would also give government encouragement to some practices that fueled the mortgage bubble. President Obama's plan explicitly states that "in some cases an appraisal will not be necessary." Weren't loans without effective appraisal, with substantial backing from Fannie and Freddie, a big part of what got us into this mess in the first place?
It's no wonder that CNBC's Rick Santelli's call for a "tea party" had such an incredible grass-roots response. Middle-class families who saved think it's unfair to bail out banks and borrowers who got drunk in the credit binge.
That said, there are of course many foreclosures caused by genuine cases of hardship in this economy, such as a job loss. But in those cases, the $275 billion could be better spent on a payroll or income tax holiday to help with relocation or rental expenses. Keeping people in their homes at all costs may have the perverse effect of keeping struggling families from moving to where there are better job opportunities.
All in all, this plan fails taxpayers, middle-class savers and investors, homeowners and the economy. The administration and Congress should go back to the drawing board to tax and regulatory relief, such as the proposals outlined in CEI's Bipartisan Agenda for Congress, that could jumpstart the housing market and economic growth.