Saturday, September 4, 2010

Obama's Jingle Mail Bailout

By Lilac Sunday, cross-posted from Lilac Sunday: Red Girl in a Blue State

The Lilac Mobile used to sport the bumper sticker above, which was produced and purchased in objection to an early Obama administration mortgage relief scheme. Obama gives me lots to complain about, so the bumper sticker has long since been superseded by others; but now that the Obama administration is about to double down on its mortgage relief failures, I'm going to have to put the same bumper sticker back on my car.

As of Tuesday, September 7, the Obama administration is putting taxpayers on the hook for its riskiest homeowner bailout scheme yet: a vastly expanded "short refinance" program which will be available to homeowners who are current on their payments and not at financial risk of foreclosure, but whose mortgages are underwater because they owe more than the home is worth.

In a short refi, the lender cancels part of the unpaid principal balance, and the homeowner stays in the home and keeps making payments based on a reduced loan amount. Short refis are not a new concept, but they are traditionally only done as an alternative to imminent foreclosure, when doing so is in the bank's interest; the amount the bank loses from the write-down is generally less than the bank would lose by foreclosing on the property, owning it, and then trying to sell it.

Obama's new short refi is different. It is available to people who can afford to pay their mortgages, but whom the Obama administration has judged to be at risk of default because they are underwater. Under the Obama short refi (additional details here), the lender must cancel at least 10% of the unpaid principal balance, and second mortgage holders are given an "incentive" (i.e., taxpayer money) to cancel part or all of the second mortgage. The incentive for the second mortgages is important, because it wasn't so long ago that people were buying houses with an 80% first mortgage, a 20% second mortgage, and absolutely no skin in the game. It's an open question, however, as to how much of an incentive will be necessary to get a second mortgage holder to cancel a loan balance that is current, so Obama's incentive could be very, very expensive.

Who are these people with 80/20 mortgages? Lots of them are people who wouldn't have qualified for mortgages under the traditional mortgage underwriting standards that were in effect before Democratic elected officials and community organizers began requiring banks to give mortgages to unqualified borrowers in the name of social justice. (Barney Frank (D-MA), call your office.) Many of these borrowers have already defaulted, and many of the mortgage defaults in the current housing crisis have taken an entirely new form: "jingle mail," where people who can afford their mortgages walk away anyway when the house's value drops, mailing their house keys to the mortgage lender. Jingle mail is an act of someone who has no equity in the house, and no sense of honor or responsibility concerning personal debt.

Obama's short refi is a Jingle Mail Bailout; a handout to people who are not at financial risk of default, but who are nevertheless a default risk because they owe more than their homes are currently worth. And why are they judged to be at risk of default? Because most first mortgages are non-recourse loans, meaning the lender can't pursue you for the debt; because the Left has turned homeownership into something the government is responsible for guaranteeing; and because of the steady erosion of the concept of personal responsibility.

With this new short refi program, which uses taxpayer money to reduce the debt of people who are not at financial risk of default, the Obama administration is subsidizing moral hazard. Everyone whose home has lost value but is still abovewater, or whose house is underwater but who would not disgrace themselves by walking away from a freely-incurred debt, should be outraged.

1 comment:

RightKlik said...

Moral hazards and perverse incentives galore!

Great post. Thanks for the info! It's hard to think of any item from the Obama agenda that doesn't reward irresposnible behavior.