Are the housing bailouts for banks or borrowers?
[T]he money that the government spends on a failed modification goes to banks, not homeowners. Typically, the government will have substituted an FHA insured mortgage for the original mortgage issued by a bank. This means that when a redefault takes place, the bank will have received most of the principle back on the loan, with the government incurring the loss on the redefault. The net result of this policy is that far more money is likely to be given to banks through the HAMP than to homeowners.
-Dean Baker, Money for Failed Modifications Goes to Banks, Not Homeowners, CEPR
What Dean Baker is pointing out is that the HAMP program looks suspiciously like a way for the banks to shed their bad loans and pile them up at the FHA. And since we know that the vast majority of FHA-eligible modifications are redefaulters, the FHA is going to need some serious capital injections via the US taxpayer.
Baker’s statements about the mod programs being for the banks and not for the borrowers jives with what I have been saying about practically all the government housing bailout plans.
Here’s what I said about principal reduction mods:
[I]t is clear that the principal reduction is more about the banks than the homeowners. In reality this is a another backdoor bailout for the banks camouflaged as support for homeowners. It is a way of recapitalizing banks by having the government pony up for the dodgy assets still on their balance sheets which they have not yet written down.
This principal reduction plan is a very direct transfer of income from you the taxpayer to the bank.
Let’s not forget that non-recourse loans are made into recourse loans under these programs too. So, you don’t need TARP to bail the banks out. And banks aren’t just getting free money via the steep yield curve and zero rates.
Have a nice day.