Banks Are Likely Winners in Obama's Latest Foreclosure Prevention Program

amborin

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Mon Mar-29-10 11:54 AM
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Banks Are Likely Winners in Obama's Latest Foreclosure Prevention Program

Edited on Mon Mar-29-10 11:55 AM by amborin

Economist Dean Baker: Banks Could Be Big Winners of President Obama’s Foreclosure Prevention Program

"....So, if we have a homeowner who’s underwater, their house price is going to fall further, we get the federal government to give some money to the banks to allow them to stay in their home another year or two years. Well, odds are that we aren’t really helping that person. They’re paying more on their mortgage than they would to rent the same house. And on top of that, at the end of the day, they’re going to end up with no equity in their home anyhow. So I don’t quite understand what’s wrong with people in this town, that you had an $8 trillion bubble, it wrecked the economy, the worst downturn since the Great Depression, and people still can’t talk about the bubble. It’s bizarre.

AMY GOODMAN: So talk about exactly what the plan is, who it will help and who it won’t help.

DEAN BAKER: Well, it’s a—first off, I mean, the important thing to understand is everything here is voluntary on the part of lenders, so it sets up a formula where, if lenders reduce principal, in some cases, that the government will issue a new mortgage, or I should say guarantee a new mortgage, at a lower principal. So say someone currently owes $300,000 on a home that we’ll say is worth $250,000.

If the bank is willing to issue a new mortgage at, let’s say, $250,000—it’d be a little less, say $240,000—then the Federal Housing Authority will guarantee that new mortgage. So that would mean the person will be paying less than their mortgage each month. In principle, they could come out ahead. But again, in many of these markets, prices are still falling.

So let’s say the home’s worth $250,000 today. A year from now it might be worth $225,000. And at that point, the person is again underwater, and the taxpayers are on the hook for the difference. Haven’t helped the person, you’ve helped the bank.

AMY GOODMAN: Who is weighing in? Who has the President’s ear on this?

DEAN BAKER: I can’t really say. I mean, the fact is there are easy things you could do if you wanted to help homeowners. The policy I’ve been advocating for over two years, almost three years now, is simply give people the right to stay in their home as renters paying the market rent for five to ten years, some substantial period of time. That will also give banks an incentive to renegotiate mortgages, if they can’t just throw people on the street. But the key thing there is that that would give people stability in their housing that this plan doesn’t give them.

So, why President Obama’s team is not looking in that direction, obviously, the banks don’t like that, because, again, everything—it’s important to understand—everything been proposed to date, entirely optional on the part of the banks. If you said that people had the right to stay in their homes, they couldn’t just be thrown out following the foreclosure, well, you’ve given a big bargaining chip to homeowners. And for whatever reason, President Obama’s not looking in that direction.

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http://www.democracynow.org/2010/3/29/economist_dean_baker_banks_could_be