The government has finally revealed its plan to spare the homes of 1.2 million borrowers. Many consumers are wondering one of two things: 1) Will this help me, and/or 2) How much will this cost me as a taxpayer? With approximately 250 million Americans living in the United States and well over half of them paying taxes, the second of the two questions seems more poignant. How much will Americans have to spend to bail out a small fraction of the population?
The Mortgage Plan
To qualify for an interest rate freeze, borrowers must meet the following criteria:
a) ONLY loans made at the start of 2005 through July 30th, 2007
b) ONLY loans that will reset to higher rate between Jan 1, 2008 through July 31, 2010
c) ONLY owner occupied borrowers (primary residence borrowers)
d) ONLY those borrowers who CAN afford 'teaser' payments & CAN'T afford resetting payments
e) ONLY those borrowers who CAN PROVE they cannot afford resetting payments
f) ONLY those borrowers who are making payments ON-TIME
Obviously this limits the amount of help to the lucky few. With so many requirements attached to this plan, it is painfully obvious that it was meant to be more of an election year stunt than genuine assistance to the borrower. People whose mortgages are already in foreclosure, have already reset, or are past due, will get no additional assistance.
The Cost of the New Mortgage Plan
The way the plan is currently laid out, taxpayers will not be funding any of the additional costs of this program. On paper the costs will be born by the banks and the consumers who get the rate freeze. As usual there are many hidden costs to this plan. Simply counting the thousands of governmental hours that went into creating this plan provides a hint at the hidden cost of its implementation.
Additionally, as a variety of candidates consider increasing its scale and scope, the public could be looking at even higher costs. This is a classic case of the government interfering with free capital markets. While it is unfortunate, foreclosures are integral to keeping housing prices in line with income. When people stretch beyond their means, there is nothing wrong with starting over as a renter and working back up to homeownership. This program short circuits that natural process and helps to keep already inflated housing prices high.
A Better Way Forward
Losing a home is never easy, but sometimes it is the best solution. For the decade before this current mortgage crisis, these same consumers were not voluntarily giving their profits back as they rode the real estate wave. When consumers make bets that housing price increases will fund their mortgage payments, they have to be ok with winning or losing that bet. In the case of today’s market, many consumers will be on the losing end of that gamble. Learning a valuable lesson and starting over is a better way forward for the consumer and for the American taxpayers. Losing a home is never easy, but sometimes it is a valuable preparation for money management and personal finance.
