Help for Homeowners?
The Administration’s new plan to help struggling homeowners gives short-term gain at the cost of long-term pain. When banks are forced to take a write-down on the balance due on loans they have made, you can be sure that loans will be much harder to obtain in the future.
There is a definite logic to asking the banks to write off part of the loan when the borrowers now find themselves upside-down, owing more than their house is worth. But, once the precedent has been established, banks will have every reason to become extraordinarily cautious in whom they approve for loans and to ratchet up the required down payment to thirty percent or even forty percent of the total cost of the house.
Tax credits for borrowers and special government programs to guarantee loans made with zero percent or five percent down will help some people buy homes, (i.e., more of the policies that got us into this mess) however, the overall effect will be to lessen the amount of money available for home financing. In the long run, that means more pain, less gain, as fewer people will be able to afford homes.
Bankers certainly know they will have to take write-downs on thousands of loans. Over one-quarter of the homes on the market in Mesa, Arizona, for example, are reported to be “short-sales.” That is, the bank has already agreed to accept whatever the house can be sold for and to write off the balance of the loan. The difference between this and what the Administration is proposing is that the homeowner loses the house. Painful, yes. But allowing the homeowner to keep the house is to reward imprudent behavior in a way that nearly guarantees it will happen again.
We are being transformed into a culture that punishes success and rewards failure. Homeowners who pay on time are being taxed to help those who did not. Consider the car companies. GM and Chrysler took bailout money. The Stimulus Bill provides for the government to buy thousands of new cars for the Federal fleet. Whose cars will they purchase? You can not tell me that the tendency won’t be for the government to try to protect its “investment” in GM and Chrysler by buying cars from them. I’m sorry, Ford. You will have to suffer for being a little better managed than your Detroit brethren.
Bankers who were cautious in their lending are now forced to compete with government subsidized banks that were foolish in their lending and investing.
Reward failure. Punish success. Change we can believe in?