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Uncle Sam needs ‘silent lien’ on bail out homes

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POSTED March 27, 2010 2:17 a.m.
Risky gambling and shirking responsibility for one’s own actions gets rewarded while hard work, delayed gratification and responsible behavior gets taxed into oblivion in the America envisioned by those who walk the corridors of power in Washington, D.C.

The taxpayer bailout of Wall Street firms who then turned around and showered fat six-figure bonuses on the whiz kids whose greed and risky judgment were the pivotal actions that sent the country plunging into The Great Recession should have proved that point once and for all.

So why is anyone angry that the latest federal move to solve the mortgage crisis essentially will bail out those who gambled on the backs of their neighbors who acted responsible?

It was one thing to have the government encourage lenders with “buy down” incentives to lower interest rates on mortgages held by struggling homeowners. It is an entirely different ball game to encourage bankers to write off principal – and then replace it with tax dollars so that gamblers can keep their homes.

There was some validity to the point that borrowers who got into trouble may have been “confused” about loan terms hence the modification of rates. It is another, though, to accept that they didn’t comprehend the dollar amount of the property they were buying.

One recent foreclosure in Manteca involved a home that originally sold for $675,000 in the Heritage Ranch neighborhood near Joshua Cowell School. Assuming the buyer used a zero down loan, it would cost – without any interest – $1,875 a month for 30 years to pay the off the loan. Toss in the property taxes and the monthly housing cost is well over $2,100 a month. Devoting more than 35 percent of your gross income to a housing payment is considered extremely risky. That means the owners had to be making a minimum of $7,000 a month assuming minimal payroll deductions for Social Security and other state and federal taxes. That’s an $84,000 annual household income to qualify for a 30-year interest free loan to buy a home

The numbers never added for very many people. So why did they take the plunge? They wanted more than they could afford, plain and simple. Forgiving part of the principal crosses the Rubicon. It rewards both irresponsible parties – the buyer and the lender - by having taxpayers bankroll the entire mistake.

Putting money toward an earnest effort for a struggling homeowner to get a handle on their financial striation by underwriting loan modifications is one thing. To cover the risk on both sides of the equation using the money of those who didn’t roll the dice shouts loud and clear the message that no one is responsible for their irresponsible behavior – the banks or the borrowers.

The lenders need to take it in the shorts for their actions just like the borrower. There is plenty of guilt to go around. The ones who shouldn’t be paying are the ones who acted responsibly.

Of course, the Chicken Littles who go around yelling the economy is collapsing to get Congress to do what they do best which is pass humongous spending bills while giving little serious thought to the details of how they work will tell you there is no other way to stave off prolonging The Great Recession.

So what can be done?

How about a plan where in exchange for getting help the stressed homeowner gives up something? If tax dollars are used to buy down the main loan, why not give the taxpayers a “silent lien” for that amount against the house that doesn’t impact their credit or ability to borrow? But when they go to sell the house, that amount comes due.

That means if the current owners in trouble sell down the road and the house gains $20,000 in equity by then over what is owed at that point, that money goes to Uncle Sam. If the federal government is owed more the amount is forgiven. Any money that is left over after paying off Uncle Sam can go to the seller.

It stabilizes neighborhoods, gives people a chance to stay in their homes, and doesn’t allow them to profit from their reckless behavior. And as far as the pain goes, it spreads out anything the government has to eat over a number of years.

The lenders at the same time should not be made whole. In order for the government to assume part of the ownership of the house, the lender would have to agree to take 50 cents on the dollar for the principal they give up. It’s a good deal. It is a lot less costly than them taking a bath through the foreclosure process.

Yes, in the end the government ends up giving out more money. But it would do so in more of a measured tone and in such a manner that more people can be helped while at the same time still holding those who participated in the reckless behavior at least partially responsible for their sins.

How the federal government has approached the mortgage meltdown proves Uncle Sam would go broke running a casino in Las Vegas.

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