Billions for Mortgage Modifications Buys Votes, Little Else

Published June 20, 2011

Since taking office in 2009, President Barack Obama has pledged $50 billion in support of mortgage modifications from the Treasury and another $25 billion from Fannie Mae and Freddie Mac. Recently, the administration has been prodding banks for up to $30 billion to be used for more mortgage principal reductions.

Then there’s the so-called Hardest Hit Fund, another $7.3 billion to states, according to the program’s Web site, “struggling with unemployment rates at or above the national average or steep home price declines greater than 20 percent since the housing market downturn.”

Buying Votes from Delinquents
This state-by-state program applies to

•    Alabama ($162,521,345)
•    Arizona ($267,766,006)
•    California ($1,975,334,096)
•    Florida ($1,057,839,136)
•    Georgia ($339,255,819)
•    Illinois ($445,603,557)
•    Indiana ($221,694,139)
•    Kentucky ($148,901,875)
•    Michigan ($498,605,738)
•    Mississippi ($101,888,323)
•    Nevada ($194,026,240)
•    New Jersey ($300,548,144)
•    North Carolina ($482,781,786)
•    Ohio ($570,395,099)
•    Oregon ($220,042,786)
•    Rhode Island ($79,351,573)
•    South Carolina ($295,431,547)
•    Tennessee ($217,315,593)
•    Washington D.C. ($20,697,198)

In many cases, the list reads like a selection of presidential-election swing states, including Florida, Ohio, North Carolina, Nevada, and Michigan. That, then, is how it ought to be viewed: As a payout by Obama to delinquent borrowers in exchange for their votes.
$112 Billion Pledged
All told, Obama has pledged $112 billion of taxpayer money for principal reductions of individuals’ mortgages across the country. That still accounts for only about 15 percent of the total $751 billion in negative equity. So despite the enormous price tag, it hardly makes a dent in the problem.

The administration promised to “help as many as 3 to 4 million struggling homeowners avoid foreclosure.” Right now, there have been only 675,000 taxpayer-subsidized modifications. No wonder, really. In order to get a modification, at a minimum, borrowers still need to show they could make the monthly payments at the reduced rate.

That so few qualify demonstrates on its face the hopeless cause of foreclosure “prevention.” The fact is, these modifications will not produce the economic, and particularly, the jobs recovery that is necessary for households to get their finances back in order.

Similarly, modifications will have absolutely no impact on the declining value of property whatsoever, as losses are ultimately realized on mortgages.

Even if the rules were eased, and principal reductions given without regard to the ability to repay, all they might do are enable a homeowner to sell his or her home without having to write a huge check for the negative equity at the end of the process, and without the bank taking a loss.

Homes Still Lost
Even then, in the end, the individual would lose the home he or she couldn’t afford anyway. The money just goes directly to making the bank whole on the loan of a lesser amount—and the bill will be picked up by future generations through the $14.3 trillion national debt. In that sense, it’s just another bank bailout.

The only difference between the modifications and a foreclosure is that Obama wants to pin the costs on taxpayers. Is that fair?

Former Fannie Mae chief credit officer Edward Pinto warned Congress last year that the administration’s modification programs were forestalling a housing recovery. He said, “HAMP has also slowed down foreclosure processes, pushing the level of heightened foreclosure activity out to 2013 or 2014 and likely extending the period for the market to correct.”

Pinto predicted a 40 percent re-default rate for the government-modified mortgages. With foreclosures continuing to rise this year, the housing slump Obama promised to end will likely continue well into 2012.

If only government had gotten out of the way in the first place, by contrast, the nation would already be in recovery.
Bill Wilson ([email protected]) is president of Americans for Limited Government.