February 5, 2009
Suppose you had $275 billion sitting on your table, and the instruction manual for this vast sum required you to devote it toward the relief of any one of the beleaguered sectors of our collapsing financial system. Is there any possibility at all that you would spend it largely on people who are current in their mortgage payments?
Of course not. But that's why you're not Treasury secretary and Timothy Geithner is!
Consider one of the signature components of the Obama administration's new foreclosure plan -- helping up to 5 million people who are current in their mortgage payments but who cannot refinance at lower interest rates because their debt is near or over the value of the house. In effect, the plan establishes the prospect of being highly leveraged as a legitimate reason to default -- and as a policy problem worthy of a taxpayer subsidy.
In making this commitment, the president's financial team fails to recognize that many other consumer credit markets operate comfortably, successfully and safely despite the fact that many borrowers are "underwater" the minute they sign the contract, most notably in home improvements, mobile homes, automobiles, RVs and HDTVs. Are we to believe that this concession will be extended to car loans, which are also experiencing significant levels of default? Will remodeled kitchens be next?
The other key component of the plan allows people who have voluntarily taken on more debt than is, say, "comfortable," (but who are current in their payments) to have their interest rate reduced until their debt-to-income ratio is no more than 31%, vs. the more than 40% they might be at today. The Treasury Department says these otherwise financially sound borrowers will have their monthly mortgage payments reduced by more than $400, thanks in part to the taxes paid by all the other borrowers who behaved in a financially responsible manner.
And finally, there's the president's commitment to allow bankruptcy judges to alter the terms of the mortgage -- a prospect that would limit future credit only to those with impeccable records.
The desire to stem the tide of foreclosures is understandable. Unfortunately, this plan is shoddily constructed. It's time for a new blueprint.
Dr. Ron Utt is the Herbert and Joyce Morgan Senior Research Fellow of the Thomas A. Rowe Institute for Economic Policy Studies at The Heritage Foundation.
First appeared in USA Today