Stop the Bleeding: A Plan to Bail Out Scared Homeowners

Maui Time | October 14, 2008
* Evictions must stop

* Feds should bail out troubled homeowners

* Government would take equity stake in home mortgages

* Cost less than Iraq War

Unemployed and desperately worried about losing his home in a California gated community, Karthik Rajaram shot his wife, kids and mother-in-law before turning his new handgun upon himself. "We believe this individual had become despondent recently over his financial dealings and the financial situation of his household," Los Angeles police said. One of his sons, age 19, was a Fulbright scholar.

The previous week, a 90-year-old Ohio woman tried to commit suicide when cops tried to evict her from her foreclosed house. Fortunately, the gunshot wound wasn't fatal.

The financial crisis has claimed a number of lives, but few as poetically as that of Ian Beach of Halifax, Nova Scotia. Like a character in a Kate Chopin novella, the 47-year-old father of two "apparently took painkillers, drank a bottle of whisky and walked into the sea," reported The Daily Mail in 2006, when the current epidemic of home foreclosures began to ramp up. "My trade in electronics gradually faded away and profit margins collapsed," Beach explained in his suicide note. "I was not able to get another trade going to support us in time, and meanwhile debt built up. Bankruptcy was an option but the house problem was the last straw."

He figured his wife could use his life insurance to keep their family home. Guess again. Death by suicide is usually exempt.

It's time to stop the bleeding. It's time to stop the evictions.

We don't want to repeat the Great Depression, when at least 23,000 Americans killed themselves. Moreover, foreclosure-related evictions destroy neighborhoods and further erode the economy. As newly homeless families wander the streets or couch surf with relatives, their empty residences become irresistible temptations for drug users, looters and vandals. Studies show that the average foreclosed home reduces the value of 48 neighboring houses by at least $5,000 -- in many cases, as much as $15,000. That's a net total of nearly $250,000 in lost value for each foreclosed home.

The median value of an American mortgage for 2005 (the most recent year data was available) was $93,000. Let's look at how foreclosures are bad for everybody. If the guy next door is facing foreclosure, making your payments on time isn't enough. It's cheaper to team up with your neighbors and pay off your neighbor's mortgage than to let his empty house lower your equity.

Some people took out subprime mortgages they couldn't afford. Do they deserve foreclosure? I don't know. What I do know is that evicting homeowners hurts society so badly -- in terms of increased homelessness, higher crime and healthcare costs, unemployment benefits paid to evicted people forced to move away from their homes, and reduced real estate values -- that it ends up costing more than the amount of money owed.

In Chicago, the Cook County sheriff has ordered his deputies to stop foreclosure-related evictions. "It's one of most gut-wrenching things we do, seeing little children put out on the street with their possessions," said Sheriff Thomas Dart. He said there has been an increasing number of renters -- who have done nothing wrong and paid their rent on time -- being thrown out of their homes as banks seize buildings from landlords who are in default. But his edict protects owners as well.

Sheriff Dart is an American hero. Now we need a President Dart for the rest of America.

It isn't going to be John McCain. McCain's proposed solution is the same tired litany of help-the-rich reductions of capital gains and dividend taxes Republicans have been pushing forever. Trust me on this, John: people getting evicted for defaulting on their mortgages don't have capital gains or dividends to tax.

There's more hope with Barack Obama. The Democratic candidate has been apparently been cribbing from my 2004 book Wake Up! You're Liberal: How We Can Take America Back From the Right, and I like it. He's promoting my then-derided ideas for a tax break for companies that hire American workers rather than ship jobs overseas, and to abolish the despicable tax on unemployment benefits imposed by Ronald Reagan.

On foreclosures, however, Obama is weak. He wants a 90-day moratorium on evictions. A nice start, but what happens after that? It's not like the economy is going to recover any time soon.

The right answer, the long-term solution, is to replicate the Wall Street bailout for individuals. It took a few weeks to get it right, but securities markets seem to like the coordinated effort by the European nations and the U.S. to pump cash into troubled banks in exchange for equity stakes -- in effect, partial nationalization.

And they said socialism was dead.

The federal government should offer people (homeowners -- not flippers, speculators, or owners of second vacation houses) the same deal as the banks.

Let's say you fall behind on your mortgage payments. A new government homeowner bailout agency -- can we call it Teddie Mac? -- offers you a choice. Option one: deal with the tender mercies of your lender's Mumbai-based customer service reps. Option two: Teddie Mac pays your mortgage. Your lender gets paid. You stay in your home. The same offer applies to property taxes -- we don't want any House of Sand and Fog-type evictions either.

What does Teddie Mac get? Equity in your home equal to the value of the payments you miss. If and when you sell your property, you settle up with Teddie at the closing. If the economy recovers and real estate prices resume their long-term climb, Teddie and the taxpayers make a profit. If prices stagnate or fall, it's still worth it because society saves all those foreclosure-related expenses we talked about earlier.

As of 2005 there were about 50 million home mortgages worth roughly $4.6 trillion. According to the experts, only about $1.4 trillion of that is at risk of foreclosure -- and that's the total, not the amount it would cost to stop evictions. If the feds were to take over payments in exchange for equity stakes in people's homes -- the same "partial nationalization" approach being applied to the big banks, remember -- the net downside risk would be significantly less, probably a couple hundred of billion or so.

In the worst-case scenario, bailing out homeowners would cost less -- a lot less -- than the cost of the war against Iraq. It's less -- a lot less -- than the $700 billion-plus Wall Street bailout. It's a hell of a lot less than the $5 trillion George W. Bush has added to the federal deficit.

Otherwise, prepare yourself for more grisly tales of desperate homeowners with easy access to handguns.

During the 1980s, Ted Rall was a trader for Bear Stearns and a loan officer for the Industrial Bank of Japan. During the early 1990s, he was a financial analyst for a banking consulting company in San Francisco. Now he draws cartoons and writes columns for Universal Press Syndicate.

Maui Time

Maui Time Weekly provides insightful analysis and in depth reporting. We believe some issues are so important they require thoughtful consideration. We are not a “paper of record”—a daily journal of government meetings, ribbon-cuttings and corporate announcements. We decide what’s...
More »
Contact for Reprint Rights
  • Market Served: Metropolitan Area
  • Address: 33 N. Market St., Suite 201, Wailuku, HI 96793
  • Phone: (808) 244-0777