Recently I outlined the details of the proposed American homeowner stimulus package otherwise known as the homeowner affordability and stability plan. This plan will cost about $75 billion and I really have to say that it is a complete waste of money.
What is the package exactly?
Basically this bill will help homeowners who are having trouble paying their mortgage. There are two groups of homeowners that might qualify:
- Mortgage payments and interest rate are too high but can’t refinance to take advantage of lower rates because their house value is too low (ie mortgage is greater than 80% of house value).
- Someone who was able to make their mortgage payments but because of a job loss or the payments have increased, they are about to default.
Read about the Making Home Affordable Refinance and Loan Modification Program.
The first group of homeowners will be helped by the government to refinance their mortgages so the monthly payments are lower. The second group will be helped by having their monthly payments reduced.
Both groups will be eligible for an incentive if they stay current on their mortgage to the tune of $1,000 per year for 5 years.
What is wrong with this?
I have no problem with Keynesian spending which says that you should spend your way out of a recession – but that spending should be applied in ways that make economic sense. In my mind – helping a homeowner who can’t afford their house is the same as giving bailout money to a car company and telling them they can’t cut any jobs. It’s also the same as bailing out someone who bought an expensive car when they were working and after losing their job they can’t keep up the payments. You can’t keep what you can’t afford – some companies have to lay off employees, some homeowners have to sell their houses and some car owners have to get more intimate with public transportation.
The US government is just going to end up paying the mortgage for a lot of people. I realize that not everyone of those homeowners bought a 6 bedroom house on a $30k salary but even if they have legitimate reasons for defaulting on the mortgage (job loss, medical issues) the principal remains the same. Stimulus money should go to businesses and people that can use that money to survive and thrive – it shouldn’t go to anybody who “deserves it” just because they have a heart-breaking story. That money is intended to help the economy and it should only be used for that purpose.
Foreclosures lower property values
One of the justifications (or selling points) for this bill is that foreclosures can lower the property values in a neighbourhood. That fact is supposed to make people who can afford their house feel better about their tax dollars bailing out their neighbours. This is a bit silly – if you can afford your house then does it really matter if the value goes down? Sure, nobody wants to see one of their largest assets go down in value but it’s not exactly a crisis.
What’s with the incentive?
The section of this bill I found most amazing was the part where the homeowner can get $1,000 taken off their mortgage principal each year for 5 years if they stay current on the mortgage after participating in this program. I don’t get it – the government is already helping them in a big way – if the program is successful and the homeowner stays current then the government gives them even more money? That makes very little sense – if the program is successful and the homeowner keeps the house then use the incentive money to help someone else.
On the surface this bill does make some sense – it will apply to homeowners that for whatever reason are about to start defaulting on their mortgage. The idea is that if you can help a person who is about to default (vs a person who has already defaulted) you can prevent some foreclosures. One of the issues which I assume will play a bigger part as time goes on is the circumstances which have lead to the homeowner’s financial problems.
From what I can tell – most of the qualification criteria has to do with whether a refinance or restructure of the mortgage will make the mortgage affordable for the homeowner. The reasons leading to the financial problems are not an issue.
My question is – if someone is… about the miss a mortgage payment and has 2 new cars in the driveway, 3 flat screen tvs in the house with full cable packages, has a great looking kitchen because they just spent $50k renovating it (or remodeling it as the Yanks say), has a stay-at-home spouse, kids in private school, a house keeper and they use brand name shampoo – should they still be eligible for this assistance?
If I was an American tax payer and didn’t qualify for this program, I would be furious. As a Canadian, I really hope we don’t see any of this kind of nonsense up here anytime soon.