The Coming Mortgage Class War II

Last month, I described how I believed the process of government sponsored loan modifications would eventually create a mortgage class war. Loan modification is the process by which banks re negotiated loans for borrowers that are struggling to make their mortgage payments. The banks create loan terms that are more affordable to the borrower. The one loan modification I saw gave the borrower a 4% rate for 5 years, 6% for two years after than, and then 6.75% for the remainder. Keep in mind that this given only to those folks that the bank determines can't afford their current payment. The government is encouraging this behavior by both insuring modifications and in the state of California mandating they be performed before any loan can be foreclosed. Once word spreads to those that don't struggle with their payments, I believe there will be a backlash that borders on a class war.

Now, Barack Obama is determined to take us another step closer to such a class war.

President-elect Barack Obama signaled a clear desire Wednesday to use a significant portion of $700 billion in financial bailout funds to stanch foreclosures by helping struggling homeowners with their mortgages. "The deteriorating assets in the financial markets are rooted in the deterioration of people being able to pay their mortgages and stay in their homes," he said.

Obama's stance represents a policy clash with Treasury Secretary Henry Paulson, who has resisted proposals to use the rescue fund to help guarantee reworked mortgages.

...

Obama's insistence that reducing foreclosures is a key component of the rescue fund came during a Chicago news conference to introduce New Mexico Gov. Bill Richardson as his commerce secretary nominee.

"We've got to start helping homeowners, in a serious way, prevent foreclosures," he said.

So, if things go according to the plans of the federal government here is what will happen. If you can't afford your current mortgage payment, the bank will work it over to give you something that you can afford. If that isn't enough, the federal government will just give you money.

If you are able to pay for your mortgage with no help you get absolutely nothing. In fact, it will be your tax money that will go to help pay for the mortgages of people that can't afford their own. Furthermore, if and WHEN government sponsored loan modifications blow up, the interest rates of good borrowers will be increased in order to cover the bank's losses.

I have also said over and over that there is a silent majority of mortgage borrowers that are responsible and are making their payments on time. They are NOT in favor of having those less responsible than them be rewarded. The process of loan modifications is just taking off but with the next half year, it will be known by the mainstream. If Barack Obama then also insists on giving struggling borrowers cash, that will be it. A responsible borrower will be furious if and when they realize someone less responsible than them is rewarded with a loan they themselves couldn't "qualify" for. They will be even more furious once they see their tax Dollars go to subsidize the mortgage payment of those that can't make the payment on their own.

At some point people will say enough is enough. These two things combined may be the final straw. This is income redistribution through a back door but it won't fool anyone. Responsible borrowers aren't stupid. They understand that if the government is spending money and they aren't getting any that the government is then spending their money. They further understand that if the government is spending to subsidize the mortgage of those that can't pay then it is their tax money that is going to subsidize those less responsible than themselves. Everyone has enough trouble paying their own mortgage and so paying someone else's is beyond the pale. If that is the case, the mortgage class war is coming.