End-Run

Let’s assume your next door neighbor, like many Americans, is upside-down on his mortgage. As real estate continues its free fall after the crash, your neighbor owes more to the bank than his property is worth. So he leans over the fence and asks you to help him pay his mortgage. How would your respond?

If you’re like most of us, you’d be sympathetic, but indicate that all of us have been affected by the great recession and that your first responsibility is to your family. You have to save for your children’s college education, repaint the house, and pay for the myriad expenses that every family faces. Nicely, you’d say “no.”

Although it’s far from a done deal, it looks like the Obama administration may try the same thing that your neighbor tried. But instead of asking you for help, the President, working through government agencies his administration controls, is going to tell you that you must help bail out homeowners who are under water. James Pethokoulis reports:

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie.

So, families that have been responsible over the years, that have not over-extended on their housing, who have paid their mortgages faithfully while watching their equity decrease dramatically, may now be asked to subsidize those who have been somewhat less responsible in their financial dealings.

But why not? After all, in this era or Obama-style big government, it's Washington that controls every aspect of the economy. Burdened by government disincentives to create job and the threat of higher taxes, the economy has stalled. Unemployed people (many of whom are upside-down) need a good job, not a phony bailout. But for the past 18 months, the President hasn't been able to figure out how to help the private sector to create jobs. But he's really good at spending money we don't have. Long-term debt? No worries. After all, Obama and his genius advisors will be long gone when (to quote the President’s past mentor) “the chickens come home to roost.”

If the Obama administration implements this new extra-Congressional bail-out scheme, it’s an admission of three things:

1. the President knows he could never get congressional support for a move like this and has decided to end-run his own majority in the legislative branch;


2. the President recognizes that his economic stimulus approach is an abject failure and as a consequence knows that a growing economy (something that just might bailout people who are upside down) is unlikely in the near future, and


3. the President is perfectly willing to use a blatant short-term attempt to buy votes without considering its long term impact on the deficit and the generations of young people who will grow up and be asked to pay it off.

There's no doubt a few million mortgage holders will be thrilled with the President's gift, but those of us who will pay for it may be slightly less enthralled with his generosity.