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Of all the government measures to right the economy, President Obama's plan to aid homeowners seems like the most irresponsible to date.
Why? Not because it helps individuals rather than big banks. Given the choice, I'd much rather help average Joe nine-to-fivers than, say, Citigroup (NYSE: C ) or Bank of America (NYSE: BAC ) . Anyone would. No one doubts that losing your home is a personal tragedy. I have a heart, thank you very much.
Nonetheless, the proposal to spend $75 billion refinancing mortgages that wouldn't otherwise be given the time of day is quite literally the epitome of subsidizing failure, without asking for anything in return.
Here's a brief overview of the plan:
- Homeowners with high loan-to-value (LTV) ratios (more than 80%) will be able to refinance, provided their loans ended up at Freddie Mac (NYSE: FRE ) or Fannie Mae (NYSE: FNM ) . This assistance will be offered even if borrowers aren't having problems paying their mortgage payments. Under any sensible lending rules, most banks wouldn't refinance with such high LTVs -- it's too risky, for obvious reasons.
- Homeowners who are at risk of defaulting on their loans -- we'll politely call them "people who can't afford their homes" -- will be eligible for refinancing aid, funded by taxpayers. As the Obama plan put it: "Millions of hard-working families have seen their mortgage payments rise to 40 or even 50 percent of their monthly income -- particularly those who received subprime and exotic loans with exploding terms and hidden fees. The Homeowner Stability Initiative helps those who commit to make reasonable monthly mortgage payments to stay in their homes -- providing families with security and neighborhoods with stability."
The plan then attempts to address a key problem we've all become sensitive to: "This initiative," it says, "will go solely to helping homeowners who commit to make payments to stay in their home -- it will not aid speculators or house flippers."
What do you call people who bought houses that exploded in value in the previous few years with a "subprime and exotic loans with exploding terms?" I'd call them speculators. What do you call people who bought homes without setting aside enough savings to cover an economic downturn? I'd call them speculators. What do you call people who bought homes that didn't fit their income profile? By golly, I'd call them speculators.
No matter. We've been aiding Wall Street speculators for months now. But -- and this is an important but -- every dime of taxpayer money injected into failing banks, be it Goldman Sachs (NYSE: GS ) or Wells Fargo (NYSE: WFC ) or AIG (NYSE: AIG ) , is money demanded to be repaid to the best of their ability, and it came with equity warrants that offer taxpayers upside potential if and when markets recover.
This homeowner aid package has no such clause. Home prices fell after a period of undeniable gluttony (like they do in all markets) and now taxpayers are bailing out speculators (yes, I'm calling them that). Yet if home prices rise in the future (and they will), the bailed-out homeowner keeps the upside. Heads, they win, tails, you lose.
I'd feel considerably better if a homeowner bailout plan came with warrants on the upside, providing taxpayers the potential to profit for the risk they're taking by injecting tens of billions of dollars into home ownership gone awry. Makes sense, right?
Enough ranting; I'd like your take. Maybe I'm wrong. Maybe I'm insensitive. Maybe you see it in a different way. Take a second to weigh in with your thoughts in the Fool poll below. Add your feelings in the comment section as well if you feel so inclined.