Obama’s Mortgage-Bribe Hail Mary

There is an informed rumor making the rounds in the financial community that we are about to get a huge, nasty surprise from Team Obama. Desperate to buy votes prior to the mid-term elections and in need of being seen to be doing something about the pathetic ObamaConomy, Obama may be about to forgive the debt of millions of homeowners who are underwater on their mortgages. All of the analysts discussing this think Obama has nothing to lose by trying this. But they’re wrong. Very wrong.

First, some background: The financial crisis began when the housing bubble burst. What had happened was that millions of Americans bought homes they never should have. This was made possible by sucker loans, like interest only loans, adjustable rate mortgages and zero percent down loans -- imprudent instruments that let spendthrift homebuyers buy way more than they should have and which depended on an impossibility -- that the housing market would never stall and they would keep receiving 20% raises every year.

These loans were in turn “securitized,” meaning that they were bound together into packets of debt, which were sold to investors as a single investment. When the homeowners started losing their jobs and defaulting on those loans in much larger than expected numbers, the value of these securities crashed, causing bank balance sheets to collapse.

To stop this, Bush and the Democrats created the Home Affordable Refinance Program (HARP), which let these homeowners refinance their mortgages through Fannie Mae and Freddie Mac. The idea was that it was better to keep them paying less on their mortgages (for a longer time) than it was to have them default. To support this program, the federal government (i.e. you and I) pledged to back up to $400 billion of these refinanced loans, should the borrowers default.

The plan being floated now would involve Fannie and Freddie forgiving most of the debt of anyone who holds a mortgage that is greater than the value of the home it secures -- it is estimated this would be 15 million people. You and I would pick up the tab for this because on December 24, 2009, the Obama Treasury lifted the $400 billion cap, essentially making us liable for an unlimited amount of debt. And "forgiving" is the same as allowing a partial default, hence we cover the difference. It is estimated that up to $800 billion in such debt would be forgiven, though that number will prove much higher as such numbers always do.

The analysts who have examined this think Obama has little to lose by trying this:

1. With the debt already so incredibly high, adding another $800 billion to a $2 trillion deficit would go almost unnoticed. And those people concerned about the debt are not likely to vote for the Democrats in any event. Thus, they lose nothing.

2. Conversely, the people whose debts would be forgiven would presumably be grateful to Obama and the Democrats.

3. The Democrats could take the credit for this program, but simultaneously distance themselves individually because this would be done through the Treasury without Congressional approval.

4. Finally, the stimulus effects of this would be significant because the people who are underwater right now are the most profligate spenders among us. And having the thrifty relieve them of their stupidity and freeing them to spend again would unleash a mass orgy of celebratory spending as these spendthrift jerks rush out to buy new SUVs and the such.

In fact, the analysts are so sure of this that Goldman Sachs, Morgan Stanley and others are putting out notes alerting their clients of this. Morgan Stanley is actively lobbying for it.

But there is something the analysts are missing: the public is furious and well informed. While the Democrats will bill this as a “bail out for main street,” the public will see through that even before the announcement is finished. They will see this for what it is: a bail out of people who recklessly over-extended themselves, of people who gamed the system, of people who used their homes like credit cards, and of people who speculated on homes as investments. These are the same spending-drunk, risk-ignoring bastards who caused the bubble that led to the financial collapse. And we’re supposed to bail them out?!

Moreover, while the Democrats will call this “debt forgiveness,” it is nothing of the sort: it is hardworking taxpayers paying off the debts run up by these jackasses. And guess who holds the debt that is being “forgiven”? Why, the same dirty SOBs on Wall Street that the public is already thinking about lining up against the wall.

If Obama does this, he will ratchet up the anger at the Democratic party to new heights. People are already furious that the Democrats have bankrupted the government to give the money to their rich banker friends. How do you think they will feel when they discover that the Democrats have decided to do it again, and have chosen to reward people who not only do not need it (as they can pay what they contracted for like everyone else), but who also are probably the least deserving among us. People would be less upset if a naked Harry Reid, Barack Obama and Nancy Pelosi danced around a bonfire tossing $800 billion in bills into the flames.

And don’t think for a minute that anyone will buy into the idea that the Treasury did this and thus the public shouldn’t hold their local Democrat accountable. One Nazi is guilty of the crimes of all Nazis.

If Obama does this, last summer’s town hall meetings will look like love-ins compared to what will happen next.

The likely date of this happening is probably August 17. So watch for the "August Bribe". . . and the September pitchforks.