Home sweet home

By Megan McArdle

So, the Obama plan to prevent foreclosures.  What to make of it?

Well, the obvious point is that it represents a massive transfer to borrowers from lenders and the rest of us.  As far as I can tell, there is no penalty for having borrowed more than you could realistically afford to repay--not so much as a speck of dirt on the credit report.  The administration's release talks a lot about "responsible homeowners", but very few responsible homeowners have payments that amount to 43% of their monthly income.  There are exceptions, of course, such as people who have just lost their jobs, but most of the people being helped are, nearly definitionally, people who bought more house than they could afford in the belief that prices would keep rising indefinitely and they would make big bucks.  It was leveraged investing, just like a hedge fund, and often at the same kind of leverage ratios.

It's hard to muster too much sympathy for lenders who made loans to these speculators, except of course for the fact that "borrower-friendly" rules like the ability of bankruptcy judges to cram down mortgages means that those of us who have not been speculating in real estate get to pay higher mortgage rates when we do buy.  Expect Chapter 13 bankruptcy to become extremely popular over the next year or so.  Also expect your own credit card lines to be cut and interest rates to rise as lenders attempt to minimize their exposures to those bankruptcies.

Obama's in a tough political position.  If he simply gives money to mortgage lenders to compensate them for modifying bad loans, taxpayers will scream.  On the other hand, if he further impairs their balance sheets, it will cost the taxpayers in other, potentially much worse, ways.  He chose the politically easy route. Me, I think if we think homeowners should get free reductions in their interest rates, we should pay for it, not make a law forcing someone else to do so.  But this is why I am a reactionary bourgeois tool of the capitalist system.

This article available online at:

http://www.theatlantic.com/business/archive/2009/02/home-sweet-home/4729/