Shocker: Yet another government intervention failure story

The only surprising aspect of this story is the fact that it still surprises people, including the New York Times, apparently.  When Barack Obama announced a $75 billion program to have everyone else in the country subsidize foreclosure protection from homeowners who got themselves in over their heads, his allies hailed it as a compassionate program that would allow those who made poor decisions with their money a chance to avoid the normal consequences of those decisions.  Now it appears that the program not only failed in its mission, but actually made the situation worse for those in danger of foreclosure:

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.

Gee, who could have predicted this?  Oh, yeah … me, and plenty of other people who wondered how a temporary modification would solve the permanent problem of living with a loan that one could not afford.  At the time, the Obama administration heard many voices advising them to stay out of the mortgage business and let the system work out the problem on its own.  It would have been painful, but it would have brought equilibrium back to the market and allowed investors to move ahead with greater confidence.

Instead, people on the cusp spent eight months paying into mortgages they will still eventually lose.  The danger of foreclosures will be extended, and now people have fewer resources with which to recover.  The only option left for government intervention is to buy the mortgages and forgive part of the principal, which essentially means that all of us will wind up paying for homes we couldn’t afford, either — and which we were smart enough not to buy.  That will also encourage more irrational risktaking in the future, as people will assume that the federal government will once again pick up the tab if failure looms again.

Just like Cash for Clunkers and the homebuying credit, the Obama administration did nothing but kick the can down the road.  Rather than addressing the real problems of the economy, Obama attempted to mask the symptoms.  Even the New York Times has noticed that Obamanomics is nothing more than smoke and mirrors, only really, really expensive smoke and mirrors.  In the end, we will all pay.

Blowback