Tuesday, April 6, 2010

Keith Hennessey on Subsidizing "Underwater" Mortgage Holders

Longtime readers of this blog will note that there are few subjects that get my dander up more quickly than the suggestion that "underwater" mortgage holders should in some way be "aided" by government. Underwater mortgages are NO different than diminished 401K's or any other investment. Investing means risk, and that risk sometimes means that one loses money. In the case of the mortgage however, one STILL retains the "shelter" value of the asset, and by this, I mean the PHYSICAL shelter value--even in the absence of monetary value equal to that of the investment.

The incomparable Keith Hennessey weighs in on this issue with eloquence and precision I can only aspire to, as the Obama Administration implements yet another plan to "keep people in their homes".

His differentiation between fixed rate underwater mortgages and ARM underwater mortgages is a useful one from a policy perspective. If you're payment isn't changing (fixed), you have absolutely nothing to complain about if the value of your house declines (well, nothing more than any other investor who has suffered losses). If you have an ARM--well then--in the way of POLICY--there is more room for government assistance. Ideologically, I still think it stinks.

I once again make the one statement in this blog that may come back someday to kill my political career--and that is, the home mortgage interest deduction should be eliminated. Period. Kaput. It advantages one class of investment over others, it encourages people to buy more house than they can afford, and it skews investment portfolios--which should be diversified and balanced--to too highly weight real estate. The arguments about home-ownership being somehow related to better civic life are overdone, as study after study in Europe (where home-ownership is less) have shown.


Anonymous said...

Socialism has often been described as when the govt. takes away the possibility of failure.

NavyAustin said...

I agree with your disdain of those who are underwater and pleading for help, but not sure about the analogy. The one difference between a 401k that took a hit and a mortgage is this: with a 401k, I'm angry if my investment tanked - but it was 100% MY money in there. I can look at the balance, decide how I want to invest going forward, and adjust my plans accordingly. I have liquidity with my remaining equity. And, if I decide to, or need money for something else, I can stop putting money in.

For a person who has signed up for a $500,000 mortgage on a house that is now worth $220,000, they made a bad "investment" decision with someone else's money. They are stuck in an "investment plan" that they will be paying on for the next 28 years, can't refinance, can't sell, and probably won't be whole on their principal for 50-60 years. They gambled, lost, and now big Vinny wants his money back.

In the 80s, when this happened in Texas and Oklahoma, these folks were called "condo slaves" - couldn't sell, couldn't rent and break even (the bank had tons of rentals that they'd picked up at 30cents on the dollar) - and couldn't move.

I get that they feel trapped. But they wouldn't be sharing their equity with me had they profited, I feel no obligation to help them with their loss.

NavyAustin said...

One other point: Most of the home ownership policies put the cart before the horse. Home ownership is the RESULT of prosperity, it is not a path TO prosperity

The Conservative Wahoo said...

Perhaps not perfect, NA, but good enough (the analogy). We get to the same place.

CCE said...

What about the poor drivers who have underwater car loans? Where's the outrage of buying and financing a shiny new car then, bang, it is not worth the amoutn of the loan 10 minutes after it's driven off the lot.

Where's the outrage in the media about poor drivers whose only transportation is repossessed because they cannot afford to pay more than their car is worth?

CW - I might agree with you more on the mortgage interest argument if I weren't in the middle of doing our taxes.

NavyAustin said...

CW - would like your comment on one fact that seems lost in all this:

Most of the bad loans were bought, packaged and sold as CDOs to institutional investors. THEY are the ones with the 401k who has tanked. Aren't THEY the ones really being bailed out here?

The Conservative Wahoo said...

I think there are two parties getting "bailed out" here, primarily. The first is the homeowner, the second is the institution holding the lien. I think most of the CDO "assets" have been taken off the books/written down.

Newer Post Older Post Home