A woman waits in line to receive counseling regarding foreclosure on her home. (Photo: Getty Images)
TARP II, the second helping of $350 billion that is supposed to restore the health of our financial system, will soon be dished out by the Obama administration. Ostensibly, much of this money will go to help homeowners stay in their homes. But, as is the case with many Washington policies, this money is also going to end up in the bankers' pockets.
The basic deal is simple. More than ten million homeowners are underwater, owing more than the market value of their home. Millions of these homeowners have fallen behind on their mortgages and now face foreclosure.
But, under TARP II, the Treasury rushes to the rescue, buying up the current mortgage at far more than the market value. It then issues a new mortgage that reflects the market value of the home, which allows the homeowner to stay in their home.
Depending on the price decline of the house, the Treasury can easily be handing $30,000, $40,000, even $50,000 to the banks so that a homeowner can stay in a home in which he/she has little or no equity. This is a great deal for the banks, but it is not very helpful to homeowners, and just about the worst use of money that the Washington policy wonks ever produced.
This is not to attack the idea of helping homeowners. Millions of people listened to the politicians, the policy wonks and even nonprofits, who told them that buying a home in a bubble-inflated market was a good way to build wealth. Almost all the wizards who gave this advice still have their high-paying jobs, but the people who took the advice are underwater in their mortgages and facing foreclosure.
People should perhaps know better than to listen to the "experts," but unfortunately, most do not. It is fair to try to give a hand to those who got taken. There are simple, no-cost ways to do this, as I have pointed out in the past.
The most obvious way to help these homeowners is to temporarily change the foreclosure process so that people would have the right to stay in their homes as renters for a substantial period of time, paying the market rent. This requires no taxpayer dollars, no new bureaucracy and it can take effect the day Congress passes it. In addition to giving former homeowners security in their home, it also gives bankers a real incentive to negotiate terms to allow homeowners to stay in their house as homeowners, since banks do not want to become landlords.
Along the same lines, Congress can change the bankruptcy law to allow judges to alter the terms of mortgage debts as part of a bankruptcy, just as is done with other debts. While this will provide limited help to a limited number of homeowners, it is likely that Congress will at least pass this measure.
But the method of "helping homeowners" that draws the most enthusiasm in Washington policy circles these days is handing tens of billions of dollars to banks for their bad mortgages. There should be no mistake that this is exactly what the TARP II plan is all about.
Banks can already get market value for their mortgages under the Hope for Homeowners legislation approved by Congress last summer. But, there is no reason they should accept market value when the Democrats in Congress are prepared to hand them tens of billions of dollars above market value.
If the point is to help homeowners, there is a really simple way to restructure the plan. When the government has worked out a deal with the bank, it can then offer to just give the homeowner the same amount. This means that if the government was prepared to give a bank $250,000 for a mortgage on a home that is currently appraised at $200,000, that it offers to hand the homeowner the $50,000 difference ($250,000 minus $200,000) before the deal goes through. This would mean that we give the homeowner the option of pocketing the $50,000 that we would otherwise be giving to banks.
Is this fair? Well, people can debate how much help we think is appropriate to give to the homeowners who got nailed by the crash of the housing bubble, but it certainly makes more sense to help the homeowners than to help the banks who made bad mortgages.
At this point, it seems that Congress is intent on handing tens of billions of taxpayers' dollars to the banks under the guise of helping homeowners. The public should insist that if the point is to help homeowners, then the homeowners should be the ones receiving the checks, not the banks.