Bad Idea of the Week

Felix Salmon reports on an idea to have the government step in to solve the ARM mortgage crisis by financing 20% of troubled home buyer’s homes.  The idea is that the home buyer now gets to pay much smaller payments and the other 20% of the house’s value just disappears down the never-never land hole of government financing.

Felix points out a number of problems, and he’s spot on with what he says.  But to me, the very real problem is that the suggestion is that a government already in a shit-storm of financial problems go ahead and take on financing equity that isn’t even there in the first place.  On purpose, that is.

Think about it.  If the value of a $100,000 home, mortgaged in a troubled ARM mortgage, has dropped by 7%, then it’s current value is $93,000.  If the government steps in and finances 20% of the original mortgage of $100,000, they’re taking on $20,000 of debt for that home.  But because the home has lost value, they’re actually paying interest on a $20,000 loan for only $13,000 worth of equitable asset.

Granted, the home owner would presumably still own 100% of his house.  But as an investment, a superfund worth only70% of its liquid assets is an albatross I’d rather not hang on our government.

Banks got us into this mess, banks need to get us out of it.  They need to accept the losses they took on properties they over-valued in the first place.  In fact, come to think of it, they’re not really losing any money anyway: they over-estimated the value of the houses, now they would simply be living with a rational price and a rational profit.  They need to refinance mortgages at the new, devalued price.

By Tommy Belknap

Owner, developer, editor of DragonFlyEye.Net, Tom Belknap is also a freelance journalist for The 585 lifestyle magazine. He lives in the Rochester area with his wife and son.