Larry Kudlow takes it to task:
Reporting from the Chicago commodity pits, my CNBC colleague Rick Santelli unleashed a torrent of criticism against this scheme. Santelli said: “Government is promoting bad behavior. . . . Do we really want to subsidize the losers’ mortgages? This is America! How many of you people want to pay for your neighbor’s mortgage? President Obama, are you listening? How about we all stop paying our mortgages! It’s a moral hazard.”
All this took place on the air, to the cheers of traders. Santelli called for a new tea party in support of capitalism. He’s right.
Obama’s so-called mortgage-rescue plan amounts to $275 billion in new debt that will have little if any lasting impact on deeply corrected housing prices or the mortgage-default problem that stemmed from the insistence of government to throw home loans at lower-income people. A modest reduction in mortgage rates will have little impact on home prices, as Harvard professor Ed Glaser has shown. And by the way, re-default rates on modified mortgages have been running 50 to 60 percent. This is not going to change. So why should we throw more good money after bad?
All very correct – but we do need to do something to deal with the fact that a lot of people who are maintaining their mortgages are now sitting on houses which have lost 50% of their value. The incentive, right now, is to go out and figure out some way to purchase one of the foreclosed houses for half the mortgage a person is carrying, and then let the other house drop into foreclosure. And don’t think no one is thinking along these lines…its the logical thing to do when you’ve put $130,000 into a house which has a 400K mortgage and couldn’t sell for 200K if one’s life depended upon it.
Such, anyways, is my situation – but, of course, I won’t do such a thing. The temptation was there, and the temptation was resisted…and now after much cajolery I managed to get my lender to see a bit of reason and we’ve worked out an acceptable deal, albeit one which still has me short the $130,000 I’ve put into the place. Not everyone will be able to resist such a temptation – and if a two income family loses one source of income (something which is becoming more common as unemployment rises), it might become a financial necessity to go the route of buying a new home and allowing the old one to drop away.
Unfortunately for us, Obama seems to be concentrating most of his effort on people who are at or near default on their existing loans. I’ve got no particular problem with helping people stay in their homes – both morality and practicality decree that I be in favor of keeping people in their homes (having someone become homeless is something we must, as believers, work hard to prevent…on the other hand, even a non-believer doesn’t want yet another foreclosure on the market to drag down housing values even further). Given that Obama is a liberal, it is a natural that his plan mostly involves throwing good money after bad.
What should we do? Essentially go into bankruptcy re-organization of our housing and mortgage markets – rework loan balances to reflect current market values…the banks will lose some of their outstanding receivables, but lots of home owners will lose a lot of money they have put into houses, even if all they’ve put in is interest-only payments for two or three years (this still adds up to quite a lot of money). Everyone loses, but then we’ve got a market where house prices match house values, and thus we can start to rebuild from there. The real beauty of this plan is that it doesn’t require a taxpayer fund to cover other people’s bad moves.
Of course, we should be open for suggestions – I certainly don’t hold my idea as the be-all and end-all of existence, but I do like the factors of human solidarity and mercy it reflects. Anyone has other ideas, they should be brought forward…maybe one or two good ideas will eventually get to Obama, and then we might actually have a recovery in the housing market.
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