bank run blog

LA Times business writer Kathleen Pender asks a question apropos of the current financial situation, “Are you an idiot to keep paying your mortgage?” The Times writer reviews the government programs currently being offered to homeowners who are facing the possibility of foreclosure highlighting the “moral hazard” that now faces mortgagees in the modern US economy. Should homeowners pay or become delinquent? Pender writes, “it’s getting harder to answer that question, especially when our government keeps giving people who owe more than their homes are worth so many reasons not to pay.”

Facing the prospect of not being able to pay adjusted mortgages and with property value plunging, American homeowners are confronted with a similar choice companies make when business dries up or fund managers are shielded from by the magic of securitization or, when things go wrong, the loving embrace of the federal government..the choice to pack up and flee.

Pender (and critics she mentions) worries that the recently proposed homeowner relief measures are too much and too dangerous for the fabric of the economy; “Critics say the plan, which applies to loans owned or guaranteed by government wards Fannie Mae and Freddie Mac among others, could encourage people to suspend payments.”

Pender describes the proposed crazy government giveaways;

“Last year, Congress started removing some financial hazards of default when it passed a bill that temporarily waives the income tax on mortgage debt that is canceled when a homeowner is foreclosed upon, sells a home for less than the remaining debt (a short sale) or gets a loan modification that reduces the principal balance…

The program announced Monday goes a step further by requiring homeowners to be late.

The Streamlined Modification Program, sponsored by the government agency that oversees Fannie Mae, Freddie Mac and 27 loan servicers, promises to swiftly reduce payments for certain homeowners who appear to be on the verge of foreclosure.

To qualify, you must be at least 90 days delinquent and live in the home as your primary residence. You must owe at least 90 percent of the home’s value. It’s fine if you owe more than it’s worth.”

Pender quotes Peter Schiff, president of Euro Pacific Capital, who “predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible.” The financial writer sketches out the mechanics of the fraud she sees tempting homeowners due to the government largess: homeowners would “stop working overtime or, if two spouses work, one could quit,” to qualify for a lower loan payment in the government program, and then, “after the modification, they could try to boost their income again.”

Pender goes back to Schiff who opines, “This is a once-in-a-lifetime opportunity. People are going to feel like complete morons if they don’t participate.”

See story-
Los Angles Times : Are you an idiot to keep paying your mortgage?