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Wednesday, May 12, 2010

More Mortgage Nonsense

Four of the worst states as far as foreclosures: California, Arizona, Florida, and Michigan want to give money to the unemployed and those underwater (they owe more than the home is worth) to pay their mortgages.

Unemployed? Owe more on your mortgage than your home is worth? Your state might one day pay your mortgage.

Giving people free money to cover their home loans is just one of the radical ways that four states -- Florida, Michigan, California and Arizona -- plan to use $1.4 billion the Obama administration is sending their way to help the unemployed and underwater avoid foreclosure.

Many consumer advocates have said the government should help cover the payments of these troubled homeowners, lest the mortgage crisis continue spinning out of control and dragging down everyone's property values. But other housing experts warn that paying off loans creates a moral hazard and could actually dissuade people from looking for work.

The first problem is that while there are many reasons to try and artificially prop up real estate prices, none of them pass economic muster. First, if you leave things alone, the market decides and I trust the market a lot more than politicians.

Second, people say that depressed home prices hurt everyone. That's not true. They don't hurt those looking to buy. They also don't hurt those not looking to sell. The idea is that if we prop up real estate prices that's good because without that, even those that are on time will be hurt because their values will go down. That maybe so but unless they are selling immediately it matters not.

Third, like all such programs, this creates a horrible moral hazard. When I first started in the business, it was standard that borrowers had a certain number of months worth of mortgage saved to qualify for a loan. 2-6 months was the general standard. That was done to protect banks in case said borrower lost their job. By providing assistance to those without a job, the government de emphasizes saving. Even more extreme is the idea that those with underwater mortgages will have their balances reduced. Now, imagine if you've paid your mortgage on time and have plenty of equity, your deal is nowhere near as good.

Beyond that, what these states are doing is the equivalent of giving Pavel the Russian operative a band aid right after Jack Bauer sprayed him with a blowtorch. Even if this made sense financially this will help a fraction of those in need of help. Instead, tax payer money will go to help a fraction of those that need help.

1 comment:

AG said...

I can't for the life of me figure out why people think that high housing prices is a good thing. Was it not just a few years ago that people were complaining that less than 1/6th of houses in California could be bought by a person making median income paying no more than 30% of their income?

The only reason people want their house values to go up is so they can flip 'em or borrow against the equity.