Mortgage bailout expanded to seconds

Diana Olick predicted this almost two months ago, but hardly anyone paid attention.  Now the Obama administration has made it official by including seconds in their mortgage bailout plan.  Instead of paying just to keep people in their homes, now we get to pay for their home improvements, too:

The Obama administration unveiled an expansion of its $75 billion foreclosure prevention plan yesterday, providing new subsidies to mortgage lenders and investors.

Under the expanded plan, some homeowners could see their payments fall significantly and the interest rate on their second mortgage pushed down to 1 percent. The announcement comes nearly two months after the administration launched the housing program, called Making Home Affordable. While officials said some borrowers have already received help, the foreclosure rate is rising and it could be months before the program begins to have an impact.

The new efforts address, in part, criticisms from consumer advocates that the administration’s housing plan did not go far enough and that borrowers still face too many barriers to receiving help.

“Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall. Every step we take forward is done with that imperative in mind,” Treasury Secretary Timothy F. Geithner said in a statement.

Responsible homeowners?  Responsible homeowners wouldn’t have taken out a second on their home equity if they couldn’t afford it.  Seconds get used for lots of purposes, including debt consolidation and home improvements, but all of these purposes are entirely voluntary.  No one held anyone at gunpoint and forced them to take a second mortgage.

Let’s revisit Olick’s rant from early March, when she scooped the media on this effort:

It’s not that I don’t get the reasoning. Sure, do all you can to help people pay their mortgage, like get rid of other debt. By why stop there? What about car loans? Student loans?? The second liens, in general, were used by borrowers to either buy more home than they could really afford or to use their homes as ATM machines. Yes, some people use home equity lines of credit to pay college tuition.

But I can’t tell you how many homeowners I’ve interviewed (and just take a look at David Faber’s documentary House of Cards to see more) who took out home equity lines to put in a pool or buy a fancy car or put an addition on the house that includes a fancy new kitchen with a Viking six-burner. And I’m supposed to pay for all that?

It’s one thing to suck up the bitter pill in order to save the greater housing market and keep families in their homes, but using taxpayer dollars to give homeowners a free ride on second liens is preposterous.

In truth, the government shouldn’t act as guarantor to first mortgages, either.  But the effort to force lenders to write down seconds is entirely absurd, for the reasons Olick stated.

By the way, guess how many homeowners took advantage of Obama’s Hope for Homeowners program, the one that promised to get lenders to write down first mortgages?  One.  It turns out that lenders resent losing money and didn’t want to cooperate with Obama’s H4H program.  This modification allocates up to $5500 over three years to lenders who adjust the principal on the loans.  Guess who’s paying for those writedowns now?  You and me.