March 2nd, 2009
04:58 PM ET

Homeowner bailout a mistake?

Editor's note: Jeffrey A. Miron is senior lecturer in economics at Harvard University

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Jeffrey A. Miron

Later this week, the Obama administration will announce the details of its Homeowner Affordability and Stability Plan, an attempt to rescue homeowners from the housing meltdown that precipitated the financial crisis.

The plan uses $275 billion in taxpayer funds to help homeowners refinance at lower interest rates and to subsidize payments from borrowers to lenders. The plan also contains new capital injections for Fannie Mae and Freddie Mac, and it gives bankruptcy judges power to reduce mortgage payments from borrowers to lenders.

This plan is exactly the wrong medicine for the economy. Here's why.

The plan's primary aim is to reduce foreclosures so that delinquent or near-delinquent borrowers can stay in their homes. This might sound like a worthy goal, but it ignores a fundamental reality: Government cannot produce the funds out of thin air; it must raise them from taxpayers.


soundoff (11 Responses)
  1. Mari, Salt Lake City

    Well........ let's see, IF the family down the street loses their job; and they can't make their mortgage payments ( bc like most Americans they have no savings!) and their house falls into foreclosure; then the rest of the houses in the neighborhood will lose value slowly but surely.

    The homeowners that need to be helped are those who were responsible, and paid their mortgage on time ...... and then lost their job!
    NO one else....... not the irresponsible ones who lied and bought homes they could not afford..... and not the speculators.

    March 2, 2009 at 7:30 pm |
  2. Annie Kate

    If homeowner bailout is a mistake because it gets its money from the other consumers of housing that bought a house the "right" way – by saving up a down payment, choosing a home they could afford, paying their payments on time – then how does that differ from the other bailouts that have already occurred? The American taxpayer is already being penalized for the greed of corporate execs, the bad business management of the auto industry, the shipping of good jobs overseas, as well as a host of other problems in this crisis. I'm not really for any of the bailouts anymore as they will keep us as a nation indebted for decades to come but I fail to see how bailing out the struggling homeowners is any more onerous than bailing out AIG, Ford, GM,Chrysler, the banks, etc, etc.

    March 2, 2009 at 7:07 pm |
  3. Darr in Cleveland

    The homeowner bail-out is off target. Instead of targeting the banks (though they are partly to blame) the big guys should be targeting the individual brokers who originate these loans. If you have noticed there already are commercials airing for refinancing of mortgages from mortgage brokers with names that sound like they're backed by the government. So you see the game is on again for brokers to begin anew with refinancing mortgages without any regulation. Do you think a broker in Ohio, Idaho, California will pass up an opportunity to make 5-7 points on a $150,000.00 ($7,500.00) deal for a borrower who is sub prime and then sell that mortgage off in the secondary market. Just like before though property values will be less. So who is going after these brokers who originated all this bad paper? For that matter, who is going after the appraisers who overvalued these properties?

    March 2, 2009 at 6:36 pm |
  4. Tom from Philly

    This is a very intracate interrelation. Until we slow repos, and stabilize home values or at least prevent an overshoot, credit will continue to tighten. With frozen credit the economy will never recover. There is plenty of blame to go around, dems for wanting everyone in their own house, repubs for comming up with inventive ways to sell debt that couldnt be paid back, but it didnt matter because the assets on which the loans were based were ony ever going to increase, RIIIIIIGHT pop goes the bubble.

    The credit freeze is forcing people into bankruptcy, By lopping off credit lines as you pay down debts, and increasing rates (which increases monthly payments) people will encounter times where they have to pay cash in an emergency then default on a credit card, utility or worse yet mortguage.

    This guys argument to NOT do it is exactly the reason TO do it, the more value lost on realestate the more people lose their equity and the tighter banks have to constrict credit. So we are either going to have to nationalize the banks or keep flooding them with money all while losing our own equity and pulling more and more americans into an underwater situation, while bringing down the economy further. The higher the reset point for the economy the more tax revenue the government WONT lose and the sooner we can close that deficit gap.

    These arguments are tanamount to arguing about which pump to use and wether we should really patch the hole in the hull of a sinking ship. PATCH THE HOLE, PUMP THE WATER at all costs or we all go down.

    March 2, 2009 at 6:13 pm |
  5. GF, Los Angeles

    Couldn't agree with you more. Now finally housing prices are dropping from the ridiculous median price of a little over half a million to the $200k's here in CA. So many people who coudln't afford a home purchased one and created this artificial buying frenzy so that prices soared to over half a million – who can truly afford paying $3000 a month for a mortgage? Those people deserve to lose their houses and the responsible who saved will now buy since the prices are more reasonable.

    March 2, 2009 at 6:12 pm |
  6. Mark

    Ever heard the saying "No sense throwing good money after bad". Learn from the mistakes. The banks are to blame – they got their money and what have they done to help the home owner ? Not much. It's time to le the chips fall and prepapre a start up fund, but bailing out home owners ? Sorry not this time.

    March 2, 2009 at 6:00 pm |
  7. end this crap

    Obama's new system (imposed and projected) is going to punish the smart, prudent, successful people and reward the selfish, not so smart people. Nobody should be bailed out. They should be made to learn from their mistakes. Unfortunately Obama's intentions very well could be to cripple these people, so they never learn from their mistakes and are dependant on the government, therefore making it much easier to push through his socialistic agenda.

    March 2, 2009 at 5:55 pm |
  8. Arachnae

    This might sound like a worthy goal, but it ignores a fundamental reality: Government cannot produce the funds out of thin air; it must raise them from taxpayers.

    Actually, this is wrong. The government can produce funds out of thin air – it does it all the time; it's called 'printing money' even though it no longer refers to the actual creation of pieces of paper or metal.

    More to the point, commercial banks create money all the time too – by giving out loans when they don't have the actual cash reserves to cover it.

    Google 'money creation' if you don't believe me.

    March 2, 2009 at 5:40 pm |
  9. xtina, chicago IL

    Im up in the air about this bailout. On one hand, the sheer volume of distressed properties causes serious externalities that hurt responsible homeowners. On the other hand, we shouldn't reward "flippers" and people who bought more house than they could afford. Their mortgages are not my problem.

    March 2, 2009 at 5:34 pm |
  10. Sharon, LA, CA

    So those of us who had all of our savings in our 401k now not only have the pleasure of having lost our retirements – we get to pay for others to keep their investments. Go figure.

    March 2, 2009 at 5:19 pm |
  11. Melissa

    Wow, you are a truly angry little man, aren't you?

    Honey, the blame lies squarely on the companies lending the money. The borrowers honestly don't know any better and they aren't economic experts like you people are.

    The campanies were taking advantage of people and giving extremely high interest rates so they could make money to people who couldn't afford it but didn't know that they couldn't afford it.

    As far as the borrower knew, those kinds of practices were normal. Most people rely on being told when its wrong because they don't spend their whole lives wallowing in economics.

    Tell me, do you blame the victim or the perpetrator? I know where the blame lies and it isn't with the victim.

    Stop blaming the victim for the companies screwing them over.

    March 2, 2009 at 5:10 pm |