Monday, August 9, 2010

Obama’s Mortgage-Bribe Hail Mary

There is an informed rumor making the rounds in the financial community that we are about to get a huge, nasty surprise from Team Obama. Desperate to buy votes prior to the mid-term elections and in need of being seen to be doing something about the pathetic ObamaConomy, Obama may be about to forgive the debt of millions of homeowners who are underwater on their mortgages. All of the analysts discussing this think Obama has nothing to lose by trying this. But they’re wrong. Very wrong.

First, some background: The financial crisis began when the housing bubble burst. What had happened was that millions of Americans bought homes they never should have. This was made possible by sucker loans, like interest only loans, adjustable rate mortgages and zero percent down loans -- imprudent instruments that let spendthrift homebuyers buy way more than they should have and which depended on an impossibility -- that the housing market would never stall and they would keep receiving 20% raises every year.

These loans were in turn “securitized,” meaning that they were bound together into packets of debt, which were sold to investors as a single investment. When the homeowners started losing their jobs and defaulting on those loans in much larger than expected numbers, the value of these securities crashed, causing bank balance sheets to collapse.

To stop this, Bush and the Democrats created the Home Affordable Refinance Program (HARP), which let these homeowners refinance their mortgages through Fannie Mae and Freddie Mac. The idea was that it was better to keep them paying less on their mortgages (for a longer time) than it was to have them default. To support this program, the federal government (i.e. you and I) pledged to back up to $400 billion of these refinanced loans, should the borrowers default.

The plan being floated now would involve Fannie and Freddie forgiving most of the debt of anyone who holds a mortgage that is greater than the value of the home it secures -- it is estimated this would be 15 million people. You and I would pick up the tab for this because on December 24, 2009, the Obama Treasury lifted the $400 billion cap, essentially making us liable for an unlimited amount of debt. And "forgiving" is the same as allowing a partial default, hence we cover the difference. It is estimated that up to $800 billion in such debt would be forgiven, though that number will prove much higher as such numbers always do.

The analysts who have examined this think Obama has little to lose by trying this:

1. With the debt already so incredibly high, adding another $800 billion to a $2 trillion deficit would go almost unnoticed. And those people concerned about the debt are not likely to vote for the Democrats in any event. Thus, they lose nothing.

2. Conversely, the people whose debts would be forgiven would presumably be grateful to Obama and the Democrats.

3. The Democrats could take the credit for this program, but simultaneously distance themselves individually because this would be done through the Treasury without Congressional approval.

4. Finally, the stimulus effects of this would be significant because the people who are underwater right now are the most profligate spenders among us. And having the thrifty relieve them of their stupidity and freeing them to spend again would unleash a mass orgy of celebratory spending as these spendthrift jerks rush out to buy new SUVs and the such.
In fact, the analysts are so sure of this that Goldman Sachs, Morgan Stanley and others are putting out notes alerting their clients of this. Morgan Stanley is actively lobbying for it.

But there is something the analysts are missing: the public is furious and well informed. While the Democrats will bill this as a “bail out for main street,” the public will see through that even before the announcement is finished. They will see this for what it is: a bail out of people who recklessly over-extended themselves, of people who gamed the system, of people who used their homes like credit cards, and of people who speculated on homes as investments. These are the same spending-drunk, risk-ignoring bastards who caused the bubble that led to the financial collapse. And we’re supposed to bail them out?!

Moreover, while the Democrats will call this “debt forgiveness,” it is nothing of the sort: it is hardworking taxpayers paying off the debts run up by these jackasses. And guess who holds the debt that is being “forgiven”? Why, the same dirty SOBs on Wall Street that the public is already thinking about lining up against the wall.

If Obama does this, he will ratchet up the anger at the Democratic party to new heights. People are already furious that the Democrats have bankrupted the government to give the money to their rich banker friends. How do you think they will feel when they discover that the Democrats have decided to do it again, and have chosen to reward people who not only do not need it (as they can pay what they contracted for like everyone else), but who also are probably the least deserving among us. People would be less upset if a naked Harry Reid, Barack Obama and Nancy Pelosi danced around a bonfire tossing $800 billion in bills into the flames.

And don’t think for a minute that anyone will buy into the idea that the Treasury did this and thus the public shouldn’t hold their local Democrat accountable. One Nazi is guilty of the crimes of all Nazis.

If Obama does this, last summer’s town hall meetings will look like love-ins compared to what will happen next.

The likely date of this happening is probably August 17. So watch for the "August Bribe". . . and the September pitchforks.


LL said...

I'm sure that a mortgage bribe will be accepted by those irresponsible folks who are hopelessly mired in debt.

Those who aren't will end up paying their bill (as we always do) at the point of the bayonet (the IRS).

Will it change the results of the November election? No. I don't think it will. However the American public has been more than willing to allow the government to bribe them with their own tax money for years and I'm sure that they'll gladly take "free money".

The real question is whether or not the bribe will stick and actually buy votes.

patti said...

as predicted, the dems are losing what's left of their minds the closer we get to november. "will this help? how about this?" the only thing they are managing to do is infuriate the majority.

Joel Farnham said...


Not only is this doubling down on stupid, it is putting 6 bullets in a revolver and playing Russian Roulette for the Democrat Party.

The idea where "I don't have to pay for it!" isn't going to fly.

This is the ruling party panicking.

This will be the final nail in the coffin Democrat Party Leaders have so assiduously been building since Nov 4, 2008.

The real bad thing about this? We can't stop it. Oh, we can complain. We can tell them to look out in November. We can predict the most dire consequences. It won't stop their stupidity.

AndrewPrice said...

LL, I'm sure the irresponsible people will happily accept the bribe, just as they happily accepted refinancing and then went right out an defaulted on those loans in even greater numbers.

But I don't think this will get them any more votes. First, some proportion of the 15 million simply won't like this, even if they will benefit. Secondly, the psychology of the people in this category tells me that they are not likely to feel grateful, they are likely to feel entitled. . . so they won't see this as any particular reason to suddenly turn out.

And the big third, is that the rest of the public will be furious. This is the proverbial bridge too far. Humans can be charitable, they will accept forced charity, and they can accept necessary evil, but they have never and will never accept unfairness -- and this reeks of unfairness.

AndrewPrice said...

Patti, yep, they're losing their minds. But this is pure political calculation -- we spend whatever it takes and do whatever it takes to win the election . . . and we worry about the consequences later.

AndrewPrice said...

Joel, Obama can't be stopped from doing this if he decides to do it. But that doesn't mean there won't be consequences. If you want to see hostility, add this to the list.

The public is like a parent who has finally lost its patience with the political class and has already begun to deliver a spanking. To now toss in this disobedience in the middle of that spanking is going to bring upon a rage, which will make the rest of the spanking look like child abuse.

I really see this as the bridge too far with the public. Right now things look bad for the Democrats, but the anger has been slowly fading over the summer and has two more months to fade before the election -- it was destined to fade to some degree because that's how human nature works. this would revive that anger and amplify it at the wrong time.

Ed said...

Anger rising...

You're right about this upping the anger level. I don't even know what to say I'm so angry. I will hold this against every democrat forever, and I swear that. I will spend the rest of my life going to their town hall meetings letting them have it for doing this. And I will vote for anyone who promises to destroy the nation's big banks. I am sick of this.

Ed said...

Seriously, this pisses me off!!!

Can we welch on this if Obama does this? Can we tell Fannie and Freddie, "too bad, go screw your shareholders and go screw Morgan Stanley?"

AndrewPrice said...

Ed, I can't blame you for being angry. This should make everyone angry. I've got nothing to offer you to calm you down, sorry. All I can say is that I hope the public really turns up the heat if this happens and that this becomes the straw that wipes out Obama's party.

Could a new administration or new Congress back out of the guarantee? Hmmm. Good question.

I suppose that as a sovereign, we could do anything we would want. Would it hurt our credit rating? No because this isn't a general default. Would it destroy Fannie/Freddie and the Wall Street boys? Maybe. Interesting idea.

Ed said...

I'm surprised you didn't reject the idea of defaulting. I figured you would! Welcome to the dark side! :-)

AndrewPrice said...

Ed, I normally would oppose defaulting, but this isn't an obligation we should have undertaken. This would be a "debt" that was foisted upon us by corrupt politicians doing the bidding of the lenders. I honestly could not care less about the effect on those lenders.

So I'm thinking, if we can default and leave people like Morgan Stanley holding the bag with worthless investments, then we should.

Joel Farnham said...

Andrew and Ed,

Isn't this tantamount to slavery? Fixing us with an unbearable burden with out our consent?

AndrewPrice said...

Joel, "Tantamount" is a strange word. Economically, the answer is yes. If you are forced to pay a debt that you did not earn and which you cannot pay off, that used to be called "indentured servitude," which was a nice word for slavery.

In this case, we could pay it off eventually, but it's an outrage nevertheless. It's one thing to tax people to pay for necessary services or to pay for some forms of charity, but this is something completely different. This is taxing people to make sure that lenders who took stupid risks don't lose any money and that people who spent beyond their means don't need to pay off their debts.

And keep in mind that these people did get the homes they bargained for. It's not like the homes turned out to be fake. They paid what they thought was a fair price for the home, i.e. it was what they thought the home was worth to them.

They overpaid, but so what? Why should the taxpayer pay them the amount they overpaid? And if we're going to get into that game, then why doesn't the taxpayer pay me the difference between what I thought my last hamburger would be worth and how it actually turned out?

Also, keep in mind, for those who simply cannot pay, there is bankruptcy. That's always been the way out for people who overspent.

This is not something the taxpayer should be covering.

Unknown said...

Andrew: The Democrats, being such good economists, accountants and lawyers, must have a provision whereby the buyers whose mortgages are reduced to match their home's current market value will pay the increased equity back directly to the taxpayers when times improve, right? No?

Some of the mortgagees realistically entered into these financial arrangements with good intentions and reasonable life business plans. For those people who are being devastated by the Great Recession, I feel true sympathy. But it's not the taxpayer's responsibility to bail them out because they didn't leave enough of a hedge for bad times.

But that's the smallest group. The big group is comprised of Las Vegas-style gamblers, fools, people who knowingly got in way over their heads in debt ("living on the come"), and unrealistic dreamers with dollars in their eyes and pennies in their bank accounts. These people ignored all the old traditional rules-of-thumb about savings, percentage of base income going to the mortgage, betting on improved interest rates at some nebulous future date, and other wholly unrealistic expectations. Far too many overbought based on show and prestige rather than family need. An equally large number bought the houses as money-makers rather than as homes and lost on the bet. I feel sorry for their foolishness and losses on their bad bets, but I don't want to pay for their profligacy.

AndrewPrice said...

Lawhawk, Very true. There are people who genuinely got squeezed, but the vast majority are gamblers.

Many of these people knew that long term rates were at historic lows, but still tried to squeeze another couple points out with an ARM. Many took interest only loans knowing they were not paying off principal and that a huge balloon payment would be due. Many took zero down loans, knowing they had no cushion of equity. And many took these loans out assuming that they would keep getting enough raises that they could "grow into" their mortgages.

And that doesn't even count the people who refinanced to put their credit card and car debt onto their house, and those who knew that home prices were at a peak but said "hey, it will keep going up forever."

Those people all made risky bets, which didn't pay off. We should not be bailing them out anymore than we should bail out people who bought junk bonds that didn't pay off, those who put their money on black in Vegas or those who lost money betting on Enron.

Also, these people have already got relief once from us by getting refinancing from Fannie/Freddie to reduce their payments. And they've chosen to default in vast numbers.

So why should we pay for them now?

Ed said...

@Joel, I see it as slavery. They want to put me to work forever so that these other people don't need to pay their debts or lose their investments. That's slavery to me.

DUQ said...

Is this happening for sure? Do we know yet? Thanks for the heads up.

AndrewPrice said...

Ed & Joel, That is sort of the definition of slavery. Though this is a little different. I don't dispute the government's right to do necessary things and to tax us accordingly, but I don't see this as anything less than robbery.

AndrewPrice said...

DUQ, We don't know yet. Right now it's being discussed behind the scenes, but no one knows for sure. If people don't start pointing this out though and standing up to it, they'll just suddenly do it. The most likely date for an announcement is August 17.

MegaTroll said...

Wow, this makes me angry. Anything we can do about it? Also, nice find. I haven't seen this anywhere else yet.

AndrewPrice said...

Mega, I'd say the thing to do is to spread the world. Call your Congressman too and let them know that they need to stop this.

MegaTroll said...

That's what I thought. So it's hopeless?

AndrewPrice said...

No Mega, it's not hopeless. People just need to let their voices be heard. With the election near, politicians will be particularly susceptible to public pressure. So now is the time to apply that pressure.

CrispyRice said...

Unbelievable, Andrew! November can’t come soon enough.

AndrewPrice said...

Tell me about it Crispy! This November and November 2012!

rlaWTX said...

I have this lovely pile of unsecured debt that my ex & I ran up - our own dumb fault - that I am ignoring until I finish grad school and make more than 25K/yr.
NOW, you tell me that all I needed to do when the ex left me for a 20 yr old intern in Pelosi's office (true story!) was buy a house I couldn't afford and add the debt onto the loan!?! Then I could get it forgiven and just owe what the house is now worth!!! Why didn't you tell me sooner??!!
< gag cough blech >

Writer X said...

No story has made me angrier than this one.

AndrewPrice said...

rlaWTX, Yep, if Obama signs this thing, then that's all it would have taken. Sick huh?

Sorry to hear about the debt problems and the problem with the ex. But if he left you for anyone connected to Pelosi, then you're better off without him! :-)

AndrewPrice said...

Writer X, That's pretty much how I felt when I first heard this. And it hasn't gotten better over time. I'm still angry.

I really think there is a visceral aspect to this that the analysts have missed. This one angers people like nothing Obama has done yet.

StanH said...

Once again an indicator of the political class getting to near hysterics. This brinks on insanity. Nobody’s perfect, everybody can fall on bad times, but damn…this is only rewarding stupidity and just kicking down the field the inevitable collapse of Fannie & Freddie. Even Barry cannot defy gravity, “what goes up…

AndrewPrice said...

Agreed Stan, but the problem is that they're trying to prove "what goes up and stay up" using our money!

This smacks of desperation.

JB1000 said...

Ah! Now I understand. Sorry but it took me a while. Illegal Immigrants, General Motors, and now homeowners. The Democrats have decided that everyone gets to choose one law they don't need to obey! It's bankrupcy laws for GM and these home owners and the immigration laws for our southern 'neighbors'.

I think that I will choose criminal damage to property. Then I can go burn down the homes of those whose debt is forgiven. If the cops catch me, I just tell them that's the law that doesn't apply to me then they have to let me go.

AndrewPrice said...

JB, I think you've put your finger exactly on the plan. From now on, what laws will apply to you depend on who you are and in what category you can squeeze into.

It truly is a sad day for America when we've come to this, isn't it?

AndrewPrice said...

Update: The Treasury now denies that there's any such plan in the works. Of course, that an a dollar gets you. . . a dollar.

MegaTroll said...

I wouldn't believe the Treasury either.

AndrewPrice said...

Yeah Mega, I don't buy it either. Or let's put it this way, I'll believe it when it doesn't happen.

Post a Comment