Democrats Face Rescue Backlash

[question everything]

The Wall Street Journal


Democrats Face Rescue Backlash
Some Voters Oppose Having to Bail Out Homeowners at Risk
By SUDEEP REDDY and ELIZABETH HOLMES
May 12, 2008

Democrats in Congress and the party's presidential candidates want to use taxpayer money to rescue homeowners who can no longer afford their mortgages, and they frame the issue as doing at least as much for beleaguered homeowners as what the government is doing for Wall Street. The White House and most House Republicans say this amounts to using taxpayer money to reward bad behavior. The Republican protests are striking a chord with some Americans who are paying their mortgages on time or who didn't buy more house than they can afford, raising the possibility that Democrats' stance could provoke a backlash at the polls in November.

President Bush is vowing to veto a bill the House passed last week -- with the support of 39 Republicans, about a fifth of their ranks -- that would, among other things, allow certain homeowners to refinance loans through a government agency if their lenders agree to take less than the full amount borrowed. The Senate is expected to take up the issue this week. Although Sen. John McCain, the Republican presidential candidate, advocates government-backed mortgages for some homeowners, he laces his campaign rhetoric with a "no bailouts" mantra.

(snip)

A Gallup Poll in late March found that 56% of Americans favor government intervention to prevent people from losing their homes because they can't pay their mortgages, while 42% oppose it. The partisan divide was sharp: 58% of Republicans opposed intervention; 71% of Democrats and 55% of independents supported the idea... Democrats are tapping into the widespread belief that the banks are being treated better than ordinary Americans... But some Republican strategists say Democrats may misread the public. "There will be massive public opinion on the side of helping the single mom who got swindled," says Republican consultant Todd Harris. "But at the same time, there will be massive voter retribution against any plan that is perceived to bail out greedy and unscrupulous speculators and mortgage companies."

(snip)

Austan Goolsbee, one of Sen. Obama's economic advisers, says the campaign weighed the downsides of rewarding bad behavior against the economic harm risked by inaction. "That's not a political calculation, that's very much the economically valid thing to do," he says. The issue, he added, is the threat that dropping home prices pose to the entire economy. Framed that way, Mr. Goolsbee said, voters are "much more amenable" to government intervention to "prevent something that's outside of people's control." Nearly all pending proposals purport to aid the deserving -- usually defined as families who own their own homes and have a shot at paying a reduced mortgage -- and shun speculators and those who lied on their loan applications. Sen. McCain made "a very conscious decision not to throw money at Wall Street or people flipping second homes," said his economic adviser Douglas Holtz-Eakin. "You don't want to reward bad behavior."

In the end, Goldman Sachs's Alec Phillips wrote in a note to clients last week, "Politicians may feel it is better to be safe than sorry. While many Republicans feel there is more political benefit to voting against a 'bailout,' there is a clear danger in blocking legislation that aims to stabilize the housing and mortgage markets when it seems clear that prices will continue to decline." He predicts Congress and the White House will agree on legislation early this summer.




URL for this article:
http://online.wsj.com/article/SB121055001830383807.html (subscription)


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[Warpy]

1. They just haven't figured out how to please both sides

by giving some sort of tax break to lenders who allow families to stay in the home as renters at whatever the original loan payment amount was---or even at the going rate for rent.

Lenders should jump at it because it should be abundantly clear to them by now what happens to unoccupied properties.

[question everything]

2. And this is why rent is going to be the next problems

Most lenders do not want to be in the property management business and there are not many single family houses for rent. If I were an investor, I would consider purchasing some of these properties and rent them to the families - provided they can pay with a more or less steady income.

Perhaps we need a mechanism to facilitate for investors to purchase foreclosed homes and then rent them back to the families, at a reasonable rate.

[PSPS]

3. One problem with that idea...

The properties in question carry ridiculously high mortgages -- certainly far above the real value of the property. If someone got an option-ARM with no-doc, they could buy anything at any price. That's why property is so overpriced (although prices are beginning to reset and will continue declining through 2011 after the pool of toxic option ARM's have reset.)

So here they are, in their $850K house unable to make their $6,000/month mortgage payment now that their rate has reset. By using rental comps per SF, the real value of the house may be half of that purchase price -- not uncommon.

Nobody will lend you $850K to take over the house. Even the lender would rather it become an REO than do that. Maybe if the current owner could negotiate a short sale with the lender, you could go there. But you'd need an additional $100K/year in income to swing another mortgage on $425K.

No, despite all the political posturing, nothing can be done to stop the inevitable. They all know it too. This is just another arrow in their quiver to prop up the housing market until after the election.