Kathleen Pender asks: “Are you an idiot to keep paying your mortgage?” in light of the new homeowner bailout plan which offers to refinance loans that are at least 90 days delinquent. She quotes financial planner, Peter Schiff who:
predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again. “This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.” … Schiff predicts that loan agents “will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan.”
Felix Salnon adds:
if you can get your principal reduced by hundreds of thousands of dollars just by quitting your job for a few months, that’s a deal which makes a certain amount of sense. It’s a pretty perverse incentive for the government to give you, but that’s the hand that millions of Americans are now being dealt. And it’s entirely the fault of the people who dreamed this scheme up.
Add to this the additional perverse incentives of an auto bailout and the opportunity costs of more (very limited) resources wasted.
The way out of the crisis is to: a) reduce the price of over-priced assets, b) weed out inefficiency in existing sectors and eventually upgrade them via creative destruction, c) invest in new infrastructure that can stimulate the rise rise of new industries. What we’re doing now is worse than forestalling the inevitable and even of pouring good money after bad – we are throwing away precious capital that is key to building a viable future.
