Altogether too often, gubmnt programmes designed to help the poor and downtrodden end up benefiting the lending institutions who have extended credit to people teetering on the brink of bankruptcy. Bailing out a farmer who is about to lose his farm may enable the farmer to stay on the farm, barely staying above water financially. But if that farm went into receivership, the bank holding the mortgage and other loans to the farmer would lose tonnes of bucks. The creditors have been the major beneficiaries of such well-intentioned programmes.
John Lott points to yet another example of such misguided bail-outs. But this one is such a blatant subsidy to the financial institutions, I'm surprised there hasn't been a major outcry about it:
The Federal Housing Administration (FHA) will offer financial institutions holding mortgages worth more than the value of the houses, so-called "underwater" mortgages, a guarantee on 90 percent of the mortgage value if the institution will write-off 10 percent of the mortgage. These risky mortgages have been bought up by Wall Street investment banks at may be 30, 40 or 50 cents on the dollar. The government now says that if the holder takes 10 percent off the mortgage, the government will guarantee 90 percent of the mortgage. So they may have bought a $400,000 mortgage for $200,000. If the mortgage holder agrees to write-off $40,000, the government will guarantee the mortgage for $360,000.Lott also points out that these programmes not only benefit the creditors, but also redistribute taxpayer wealth to the profligate and to those who tend to be better off:
What was once a mortgage worth $200,000 to the investment bank is now worth $360,000 that they can turn around and sell for that tomorrow. And now, let's do the math. You, the taxpayer, have just given these Wall Street investment firms $160,000!...
Some of the money will to those who made unwise decisions in the past, but much more of the money will go to investment bankers who bought the mortgages that they hold at a discount. In any case, government policies caused housing to be over built in the past, and Washington should concentrate on making investment in general more profitable by letting people keep more of the money that they make, not in helping [t]hat industry by taking money from other places in the economy.
Many people receiving this money are the very ones who the government forced banks to lend money to that lead to all the financial problems. Poor minorities who couldn't afford to put down money on their homes, who took out a mortgage equal to 100 percent of the value of their home, are the ones most likely to have their homes underwater.Programmes that reward profligacy tend to encourage even more profligacy. After all, people respond to incentives.
To make matters even worse, the many responsible homeowners are being excluded from these windfalls.
Suppose that you couldn't afford your home and you didn't want to default, so you did the responsible thing and rented out the home and moved into a smaller apartment. Guess what. You aren't eligible for this write-off.