Are the housing bailouts for banks or borrowers?
[T]he money that the government spends on a failed modification goes to banks, not homeowners. Typically, the government will have substituted an FHA insured mortgage for the original mortgage issued by a bank. This means that when a redefault takes place, the bank will have received most of the principle back on the loan, with the government incurring the loss on the redefault. The net result of this policy is that far more money is likely to be given to banks through the HAMP than to homeowners.
-Dean Baker, Money for Failed Modifications Goes to Banks, Not Homeowners, CEPR
What Dean Baker is pointing out is that the HAMP program looks suspiciously like a way for the banks to shed their bad loans and pile them up at the FHA. And since we know that the vast majority of FHA-eligible modifications are redefaulters, the FHA is going to need some serious capital injections via the US taxpayer.
Baker’s statements about the mod programs being for the banks and not for the borrowers jives with what I have been saying about practically all the government housing bailout plans.
Here’s what I said about principal reduction mods:
[I]t is clear that the principal reduction is more about the banks than the homeowners. In reality this is a another backdoor bailout for the banks camouflaged as support for homeowners. It is a way of recapitalizing banks by having the government pony up for the dodgy assets still on their balance sheets which they have not yet written down.
This principal reduction plan is a very direct transfer of income from you the taxpayer to the bank.
–It’s unanimous: Propping up underwater mortgages is a bad idea, March 2010
Let’s not forget that non-recourse loans are made into recourse loans under these programs too. So, you don’t need TARP to bail the banks out. And banks aren’t just getting free money via the steep yield curve and zero rates.
Have a nice day.
I don’t understand the distinction here. Itsn’t it clear that all of these programs are to benefit the imprudent and profligate at the cost of the prudent and the poor?
Some directly favor the creditor (TARP, HAMP and others) and some the debtor (home buyer tax credits) but in the end they are all at the cost to the prudent and poor.
After all it is only the prudent and poor that didn’t participate in the credit orgy that the US government is trying to start up again.
Aram,
I just got back. So I’m sorry I haven’t been in touch yet.
The contrast you make seems to be a false one to me. There ARE borrowers who bought houses at realistic prices and are in jeopardy of losing their home.
Not everyone lived in a bubble market or took out an unpayable mortgage. Some people actually worked hard, saved, bought a house and are now unable to make payments because they lost their job, got a divorce, or fell ill.
So, let’s not paint with such a broad brush. A better approach is to say that, despite these heart-rending cases, you question any sort of bailout because they are a moral hazard. That seems a more accurate statement.
I can live with your approach but my goal here really wasn’t to place blame or talk about moral hazard. My goal was to contest this new narrative that seems to be gaining momentum.
This narrative seeks to place blame on big, bad bankers.
The recession we are now in, according to this narrative, has nothing to do with the over-expansion of credit and excessive accumulation of debt that the US has experienced since the 80’s.
It was really just these big, bad bankers that got the U.S. into a mess. Therefore if we just put a few of them in jail or embarrass them in Congress our problems will be solved.
When in fact in order to resolve this problem there needs to be some way to restructure (or slowly pay back) the debt governments and households have accumulated.
What is the investing implication here? If banks continue to get help moving toxic waste off their balance sheets, shouldn’t we be more bullish on banks (and bearish on the US fiscal regime – although that is a longer time horizon play)?
Yes, if the banks can move this stuff off the books, that would be bullish for bank shares. The greater threat to banks now is monetary, fiscal and regulatory policy. Note, I am not making a judgment except as relates to the impact on the shares.