If you enjoyed the first mortgage lending financial meltdown, you’ll love part 2! Today the Washington Post reported that the Obama administration wants to assure banks that he’ll bail them out (again!) when risky borrowers default on their home loans.
Obama is sadsies that many young people and deadbeats still can’t get mortgages. Though it might seem like making homes loans available to all borrowers would help low-income families, it’s actually going to screw them big time for three main reasons.
First, Obama’s only gonna bail out banks, not individual borrowers. The loans are by definition going to people who not super likely to be able to make their payments. When these people default, they’ll have bills in the tens of thousands of dollars, plus damaged credit. All while the bank executives will receive bailout checks and bonuses.
Second, when you subsidize something, you make it more expensive. Making anything, homes, food, gas, more expensive obviously hurts poor people the most. Home loan guarantees are guaranteed to lead low-income individuals to take out bigger loans for the same amount of house. Then, when they in turn default, it’ll be even more ruinous than they would have been in an unsubsidized market!
Third, owning a home makes it harder to move when you need a new job. Research shows that labor mobility is especially essential to low-income, low-skill individuals. It’s hard to work your factory job remotely. Plus, low-income people are least likely to have months of financial cushion built up to pay their mortgages while they look for a new job.
It’s great that President Obama cares about the ability of poor people to buy homes. But more expensive, risky, mobility-decreasing mortgages are actually the last thing that poor people need. The only people who actually, consistently benefit from making mortgages available to poor people are bankers, who get all the reward in interest payments and the mortgage-backed security market, and none of the risk through bailouts and government assurances. While poor people will be paying back banks for years to come, bankers will float away in golden parachutes financed by taxpayer dollars.