In an article this week by James Pethokoukis of Reuters, An August Surprise From Obama?, Mr. Pethokoukis outlines a rumored plan by the Obama administration to bail out the millions of home owners who are under water on their homes through the Making Home Affordable Refinance program.
The plan, supposedly set to initiate just in time for the fall elections, would influence Fannie Mae and Freddie Mac to forgive a portion of home owner mortgage debt that is in excess of the home's appraised value.
If you are a home owner that is in that situation and reading this article, you are probably rejoicing. Left with few options, this may be the bailout you have been waiting for.
That being said, and I usually don't get political, the timing of this plan is interesting with the current administration losing popularity and the fall elections looming. Although such a plan will undoubtedly help millions in the short-term, what are the long term effects of yet another bailout?
If you aren't familiar with John Mauldin, his take on the proposed plan is a good one in my opinion, and his newsletter is a good read each week. Here is an excerpt:
"I hope this is just a rumor. Seriously. You want to tax renters (about 35% of us) to help pay for mortgages for people who entered knowingly into a business transaction that sadly did not end well? I truly feel sorry for them. I have several very good (and responsible) friends who are in trouble, and I understand the issues. They just bought at the wrong time. But what about my investment in a start-up that failed? People who are behind on credit cards? If you bought a new car, you are underwater the moment you drive the car off the lot. Help for those? Where does it end? Hundreds of billions of debt that our children will have to pay? Say it ain't so, Joe. You can read the whole blog if you have adult beverages or blood-pressure medicine nearby."
These continued bailouts are great in the short term, but must be re-paid eventually and will burden future generations. It's the "pay now vs pay later" argument. What will be the long-term effect of another trillion-dollar bailout like this?
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