05.17.2011 0

The Lowdown on Obama’s Mortgage Cramdown

By Bill Wilson – Whatever Barack Obama cannot achieve legislatively, he appears Hell-bent on just doing administratively.  The latest example is mortgage cramdowns — where the government would arbitrarily reduce the principal owed on a mortgage for some underwater borrowers who now owe more on their homes then they are worth.

This was the issue that set CNBC’s Rick Santelli off on his rant that helped inspire the formation of the tea party movement.  In response to President Barack Obama’s then-$275 billion mortgage modification plan he famously asked traders on the floor of the Chicago Mercantile Exchange, “This is America! How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills? Raise their hands.”

No one raised their hands then.  And, surely, by now, the American people have had enough of these games from Washington.

In 2009, a version of the mortgage cramdown idea was defeated by Congress that would have allowed federal judges to reduce the principal owed on a mortgage.  It fell 15 votes short of passage in the Senate, and that was when Democrats had a supermajority in that house.

Such a proposal would have been very costly.  As a matter of fact, according to Zillow, Inc. some 28.4 percent of homeowners are currently underwater on their mortgages.  Put another way, out of the current $13.832 trillion of outstanding mortgage debt, there are about 11.1 million homeowners with $751 billion in negative equity in the U.S. right now, as reported by CoreLogic.

Of course, nobody is talking about a bailout quite that large.  So, it won’t be that large.  In fact, some estimates by officials of the mortgage modification proposal now have it at about $30 billion, according to the Huffington Post.

That’s only about 3.9 percent of the total $751 billion negative equity that’s actually out there.  Therefore, hardly any underwater homeowners would even get a bailout.  Will your home be a part of Obama’s $30 billion mortgage bailout? There’s a 96.1 percent chance that the answer is no.

The $30 billion in cramdowns would reportedly be a part of an agreement between state attorneys general and the White House, as part of penalties levied on JP Morgan, Bank of America, Chase, Wells Fargo, Citigroup, and Ally Financial for allegedly “faulty” mortgage practices.  Yeah, sure.

But since they will only reach a few choice citizens — about 443,000 of 11.1 million underwater borrowers — it is worth asking: How will the Obama Administration decide who gets a mortgage cramdown and who does not? Arbitrarily, that’s how.

Not that it will help.

Zillow and CoreLogic’s data confirms what Case Shiller has also reported recently, that home values are still plummeting.  Within a month, they will be below their April 2009 lows as foreclosures continue to rise this year.  Despite all of the bailouts that have occurred, we are in a double-dip housing recession.

Zillow does not foresee any bottom in housing until 2012, at the earliest. The irony is that we would have already hit the bottom of the market if government had just got out of the way, even if it meant that institutions that bet poorly on housing were allowed to fail.

Instead, we have wasted trillions of dollars on a lie that the government could somehow stop the housing bubble from deflating.  All the bailouts have done is prolong the recession.  Sadly, Obama is not yet satisfied and wants more of the same.

The latest $30 billion bailout proposal will not stop the foreclosures — which are not even caused by negative equity.  In fact, they are caused by a failure to meet monthly payments, and lowering the principal owed on those mortgages will not change that.  It’s just another handout by Obama — to favored constituencies.  Watch closely to see who actually gets the bailout this time.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

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