FDIC to the Rescue?

by Alex Stenback on October 30, 2008

Though details are precious few, the Wall Street Journal, and others report on a soon to be announced FDIC/Treasury initiative to aid some 3 Million homeowners in danger of losing their homes.  From the WSJ:

Estimated to cost between $40 billion and $50 billion, the plan would have the government agree to share a portion of any losses on a modified mortgage offered by lenders.

Funding for the plan could potentially come out of the $700 billion financial-rescue program authorized by Congress earlier this month. The plan, which was previewed during Congressional testimony last week, would represent one of the most aggressive and sweeping moves to address the nation's foreclosure mess, among the last elements of the crisis yet to be addressed by concerted government intervention.

Though we don't have near enough detail to make any judgment on this program, from a philosphical standpoint, if we're going to be raping and pillaging the taxpayers in the bailing out business (which we clearly are) some of the spoils this assistance has to find its way to the homeowner level.

So, yeah, it's a good thing.  But here's the thing: If this is not structured very carefuly, giving homeowners an incentive to NOT take the help, it will be shot-through with unintended consequences and be an absolute disaster.  We need details.

{ 3 comments… read them below or add one }

Jennifer October 31, 2008 at 11:16 am

At the risk of becoming my father, I can’t help but think that we are majorly rewarding really reckless, bad behavior here. (And with the bailout too.) There better be some danged strings attached.

Nate November 3, 2008 at 11:22 am

This is a horrible idea.

Say I purchased a home in 2003. I could have bought either home A for 350K (which I could afford), or I could purchase home B for 500K (which I could not afford, so I took out an innovotative loan product). Now because I can’t afford the home, the loan is going to be reworked to be affordable?

What about every responsible person who made the decision to purchase a home they could actually afford? If these programs are only targetted at those who can’t afford their current homes, it’s going to be a damned mess, that will impact the housing marketplace for years.

Alex Stenback November 4, 2008 at 4:36 pm

Agree, this whole thing is a complete and utter mess, and in a perfect world we’d let all of the bad debt fail and take the banks and overextended homeowners down with it.

But since the bailout has been passed, our only point here is that if we are picking winners and providing financial absolution, it may as well extend down to the individual homeowner on at least some level.

Otherwise all we are doing is pushing the consequences down onto the backs of the homeowners, while the banks and the rest of the lending food chain carry on largely intact and unscathed.

In other words, if we are going to be raiding the Federal coffers for this enterprise, then why should individual homeowners be the only ones left to suffer the consequences of their decisions?

Regardless, any sort of relief will extend only to a very small percentage of homeowners, and it will have be a non-impact event on prices.

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