Obama's Next Bailout

Home flippers get a sweetheart deal from the government.

Take yourself back to the good old days of 2006, when the Azzurri rightly ruled the football world and Lana Del Rey had not yet taken icicle form. With a good paying job, and only two more years of the Bush administration in sight, you decide to buy a summer home on Miami Beach. It is a good investment, you reason, until the real estate market collapse and leaves you several hundred thousand dollars underwater. And even though you’ve rented out the home since 2006 and kept your well-paid job, with about 20 percent of homes in America worth less than their mortgage it has been almost impossible to get a modification or refinance the mortgage to buy something more affordable.

Until now.

Under a revised White House program, second homes—whether owned as a rental property investment, as a vacation home, or just as an extra mortgage from a house-flipping project gone array—are now eligible for taxpayer subsidies to reduce the principal on the underlying mortgage. This means that even though you made a poor investment decision with that home in Miami, taxpayers will now help foot the bill to reduce your mortgage by several hundred thousand dollars at little cost to you.

The program is called the Home Affordable Modification Program (HAMP), and it was started by the Department of Housing and Urban Development since 2009. You might have heard about it, as it is one of the Obama Administration's most widely panned programs.

Second (and third) homes had been “excluded” from federal programs to subsidize housing. But in the wake of changes to the federal refinance program announced in the State of the Union address last week, the Obama administration is now seeking to relax the rules on its loan modification program to increase its impact.

HAMP got started in early 2009 by using $29.9 billion from the Troubled Asset Relief Program (the bank bailout fund). It was supposed to work by offering payments to mortgage servicers in exchange for modifying the principal due on mortgages. However, nearly half of the trial modifications that were started ended in failure. And according to a monthly HAMP report in January, only 909,953 mortgages had permanent modifications through the program—costing the taxpayers an average of about $2,000 each so far. (See page 57 of the Inspector General report on TARP from last week.)

Since the goal from the start has been to modify as many as five million mortgages, the White House is moving to increase the pool of eligible mortgages by reducing the standards necessary to qualify. After all, it is not like reducing mortgage standards in order to accommodate more homeowners has ever been a policy leading to disaster before, right?

Mortgages on rental properties are now eligible for modification—meaning the total amount owed, not just the interest rate, may be reduced to avoid foreclosure. If the home you live in cost you $300,000 (plus interest on the mortgage) when you bought it, but now is worth just $225,000, HAMP could pay a lender to summarily knock $75,000 off the mortgage. If you own a second home and rent it out (even if that was not the original purpose of the home) you could get the same deal for a mortgage that started out at $700,000 but today is worth substantially less.

Remember when companies that bought insurance from AIG got paid 100 cents on the dollar from the September 2008 bailout? This is the same thing, except the recipients are people who flipped homes and were caught holding the hot potato.

Another part of the revamped HAMP is to triple payments (from between 6 and 21 cents on the dollar to between 18 and 63 cents on the dollar) for lenders and servicers who reduce the amounts owed on mortgages. This deal is open to both private lenders and to Fannie Mae and Freddie Mac (who essentially would be getting a subsidy from HUD to modify a mortgage before asking the Treasury Department to subsidize the rest of the losses). The program will also stay in effect until the end of 2013, instead of its original 2012 conclusion date.

The reality is that we simply have no need for this program. Even for those individuals who favor principal modifications as the solution to the housing crisis, there were still 2.6 million private modifications that occurred during the same timeframe as HAMP, without any subsidy needed.

At best, HAMP wastes resources for something that is being done better without the government’s heavy hand. At worst, HAMP is dragging out the housing crisis by delaying necessary foreclosures. Either way, there is no good reason why investors who bought homes to rent or flip should be bailed out by the taxpayer.

Anthony Randazzo is director of economic research at the Reason Foundation.

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  • Fist of Etiquette||

    The risk-free enterprise, it's what made America great!

  • Confusius Say||

    I would have worked much harder in my business had I known I'd bear not of the consequences had it failed.

  • Confusius Say||

    I would also spell better than to make none into not.

  • Bill||

    Try again Confusius. It still has the opposite meaning you intended.

  • Sevo||

    I'm not Confusius, but I wouldn't have wasted time trying to make my business work if I knew someone would reward me regardless.

  • Do blacks have RIGHT TO TAKE?||

    • Is the right to take a negative or positive right?

    • Is any white person's right an individual right or a collective right?

    "[The Native Americans] didn't have any rights to the land ... Any white person who brought the element of civilization had the right to take over this continent." ~Ayn Rand, US Military Academy at West Point, March 6, 1974

  • ||

    Did anyone see a fuckin' injun around here?

  • ||

    Fucking Obvious troll tries again,AGAIN.Response under friday funnies comment thread.

  • Do Chubtastic caucasoid ||

    idiots with bad hairdos have a right to take up valuable snark space with more of their bad undergrad anthropinions?

    Is that you John Wayne....is this me?

  • Is a person The Borg?||

  • bi-curious||

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  • Sevo||

    "looking for the bilover?"
    No.

  • Bad Reader||

    oops, i thought it said "boilover"...like it was an ad for some auto-venting pot lid.

  • bi-curious||

    looking for the bilover?---datebi*cO'm--- is a site for bisexual and bicurious singles and friends.Here you can find hundreds of thousands of open-minded singles & couples looking to explore their bisexuality.sign up for free.

  • Gus||

    Political Diary
    Still Club Fed
    A CBO report says that on average the compensation paid to federal workers is nearly 50% higher than in the private sector.

    http://online.wsj.com/article/.....LEFTSecond

  • ||

    When was Obama's first bailout? A portion of TARP? Not his technically.

  • Confusius Say||

    Evidently you missed the Bush-Obama administration.

  • Some Guy||

    Already locked in for a 4th term.

  • Jordan||

    Puhlease. The dude voted for it and wholeheartedly supported it.

  • ||

    So did 300+ other Congress people.

    TARP is on Bush and the GOP. It fit their Big Gov Decade that started with NCLB, Medicare Welfare, Housing Downpayment Gifts for the poor, etc.

  • Some Guy||

    So did 300+ other Congress people.

    Yes. Fuck them. Fuck them very much.

    But how does the fact that lots of people did something evil absolve him from being one of them?

  • Sherreek,||

    Since Obama ended all the wars, I suggest you invest in the defense industry.

  • Sevo||

    shrike|2.3.12 @ 4:41PM|#
    "...Not his *technically*."

    Shriek, don't you get dizzy from all that spinning?

  • ||

    So what does it take to get in on this? Do you have to be underwater? So if you bought what you could afford, made a reasonable down payment and have actually refi'd and paid down more quickly than necessary, can you get some swag? Or is this just another one for irresponsible fuck bags while I can sit and feel like a fucking chump for being so god-damn stupid as to have a bit of responsibility?
    -K

  • ||

    Why do you hate poor people?

    (BTW, 'array' for 'awry' is rilly rilly stoo-- unfortunate. Where are the editor squirrels?)

  • Hugh Akston||

    Reason has to have a couple dozen people with "editor" in their title. You'd think one of them could pick up a copy-editing pen once in a while.

  • H. Protagonist||

    I bought what I could afford, made a reasonable downpayment, and paid early. Then I got laid off, and rented it out for a couple of years, and found employment in another state. Then, last year, I sold it for a healthy loss, though I wasn't underwater (say goodbye to that healthy downpayment and early payoffs, however).

    I, also, am such a fucking chump.

  • ||

    It gets worse. Now you and your progeny get to pay taxes for this program plus interest on borrowed money for this program.

  • ||

    I don't know how to get in on it, but you can get really fucked by this program if, say, you and a spouse are sitting on a relatively large amount of cash apart from investments, earning .01% interest, and would like to, I don't know, score a beach place on the cheap...

    ... but you can't, 'cuz this program is holding off foreclosures and keeping prices artificially high.

    So, you can be screwed by HAMP for rental properties, or even the possibility of HAMP for rental properties. There's that.

  • sounds real good||

    Damn, I sold my sole residence in 2006 when I saw the market slowing down. Lost money on the sale. Sticking around for a bailout wouldn't have been worth the stress, but screw these people anyway.

  • Wait, What||

    The reality is that we simply have no need for this program.

    We have no need for assault rifles either, but we got 'em.

  • Bobarian||

    Hey - I need an assault rifle.

    However, I have a house that I can't sell, but I don't need this program. But if Big Brother Barry will give me free money from your pocket, I'm probably going to take it.

  • Siskel & Ebert||

    We have no need for assault rifles Sylvester Stallone movies either, but we got 'em.

    FTFY

  • ||

    House flipping? Are people still doing that? Around here sales and construction have been at a stand-still for two years. Some construction sites look like the builders just dropped their tools and walked off the job two years ago. I can think of two half-million dollar houses that have weeds growing out of the windows.

  • ||

    ooops. Forgot to change my name back...busted.

  • ||

    This means that even though you made a poor investment decision with that home in Miami, taxpayers will now help foot the bill to reduce your mortgage by several hundred thousand dollars at little cost to you.

    Obama just doesn't get it.

    The program is called the Home Affordable Modification Program (HAMP).

    What'd you expect 'em to call it?

    Let's Reignite the Tea Party?

    Let's Get Santelli Rant II?

    http://www.youtube.com/watch?v=zp-Jw-5Kx8k

  • A Resident Pedant||

    ...house-flipping project gone array...

  • ||

    I saw that awry was misspelled, too! Me... pick me!!!

  • Michael Price||

    It went from one house flipping project to many all with sequential addresses.

  • ||

    This change is not about investors getting a bailout. It is about helping the many Americans who have done nothing wrong and got caught up in this mess.

    This change is not about investors getting a bailout. It is about helping the many Americans who have done nothing wrong and got caught up in this mess.

    Take for example, people who have lost their jobs and forced to move to another city for a new job, yet can't sell their house because it is underwater. They are not flippers, nor people who made risky investments. They are just normal people in a bad situation that they did not cause. This change is for people like them.

  • Bill||

    Yeah. For all those poor people with 2nd and 3rd homes. FAIL.

  • Mollyg||

    This is not about people with multiple homes. Think about about people struggling to deal with one house, while renting in another city.

  • mgd||

    This is not about people with multiple homes.

    Did you read the article? It is, exactly, about people with multiple homes. It's about the Obama administration changing HAMP to make second and third homes eligible.

    How is that not about people with second and third homes?

  • Mollyg||

    Yup, I read it wrong. It will not help the people who I thought it would. It will help people who buy up foreclosed homes and rent them out. Silly me for thinking that Obama would actually help those who need it.

  • ||

    It's an election year. Gotta buy them votes.

    I sometimes wonder if all of the screeching about Citizens United is just meant to distract voters from corruption like this.

  • ||

    How do I get in on this?

    I want free money!

  • J Robert Giles||

    Please read and share the following article. "We the people" has become nothing more than the mantra of those trolling for our votes.

    http://jrobertgiles.blogspot.c.....isons.html

  • ||

    Rates are low, but I can not re-fi. I have a credit score of 760. I have a 4 year old 30 year mortgage that I have made every payment on. Bank says I have to bring $80k to the table to re-fi. That is Bullshit. I am not asking for a new home, I am not asking for a hand out, I am only asking to re-fi at the advertised rates. I really don't like Obama, but I have to support his efforts to let people like me, financially sound, who played by the rules have a shot to re-fi. How does refinancing my loan make it more risky? Do the banks think I won't risk my credit score on a strategic default?

  • ||

    Of course a servicer or bank wants to put every obstacle in your path to refinance that is possible: it is in the mortgage holder's and servicer's best interest to do so.

    If you refinance, the law says the mortgage holder who risked his $ at a set interest can't charge pre-payment penalties (or at least not large ones) so the holder gets less $. If you default, the servicer gets many high priced charges and overages and isn't affected by the loss of principal (different company). So the system is against you and wants to hold you to the contract you initially signed.

    Strategic default, depending on the state, might not be as easy or as clear as has been reported - you could be responsible for the bank's loss. I am waiting until some debt agency buys for pennies most of the losses from a bank in recourse state or a state with finance loop-holes (taking $ out of equity often negates any non-recouse, depending on state) and starts filling against those who strategically defaulted.

    Until enough people go ahead and strategically default to force a change in policy or the Government steps in and forces the issue to make holders refinance underwater owners, the situation will stay in limbo.

  • ||

    Somewhat misleading - the unpaid principal balance is "effectively" reduced by tacking on the amount to the end of the Note as a balloon payment due at the end of the term, it's not written off or forgiven. the Admin. is not in a hurry to advertise that particular aspect, however...

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