If you are a mortgage holder who is either struggling with crushing payments, bitter for having overpaid for your home during the bubble, or who has extravagantly refinanced when prices were rising, the government's landmark $700 billion bailout package has an important message for you: stop making your mortgage payments . . . immediately. Furthermore, if you believe that with some planning and sacrifice you may be able to meet your mortgage obligations, the government's message is clear: relax, don't bother.
While angry voters have labeled the package as a bailout for Wall Street, it is more akin to a “Get out of Jail Free” card for anyone who acted irresponsibly during the boom.
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If you do get the opportunity to live for a while with no mortgage payment, don't make the tragic mistake of using your extra cash to pay down your credit cards. As the growing level of credit card defaults will soon push credit card companies into bankruptcy, we can expect a similar bailout plan for American Express and Discover Financial. When that happens, expect massive balance reductions for Americans who can demonstrate the inability to pay. The bigger your balance, the greater the benefit.
Taxpayers, however, will not be so lucky. The savvy investment strategists who see the government turning a tidy profit on its mortgage purchases have not factored in the incentives that will discourage nonpayment. The only way the government will be able to profit would be to buy the mortgages at deep discounts to actual loan values. However, if the purchase prices are too low, the plan will bankrupt the institutions it is trying to bail out. On the other hand, if it substantially overpays, which seems far more likely, it will bankrupt the nation.
In any event, as more and more borrowers succumb to the allure and safety of nonpayment, look for the number of troubled assets to swell. This will ensure that the $700 billion merely represents the first installment in what will be a multitrillion-dollar plan. Just as government policies provided the primary impetus in blowing up the housing bubble earlier in the decade, its latest attempt at market manipulation will only result in making a terrible problem far worse.
