Where's the Moral Hazard?

by Gerri Willis

Brace yourself.

There's another homeowner bailout on the horizon.

After months of investigation and negotiation, the nation's Attorneys General (most of them anyway) have agreed to a bailout that may cost as much as $25 billion to be paid for by the nation's largest banks.

And, like all the housing bailout programs before it, it will make the market worse, not better. That's my expectation.

It fails on another count. It's not fair to the millions of homeowners who pay their mortgage each and every month.

More on that in a moment, but here are the basic details of the plan, which are still being worked out... In other words anything can happen.

Number one: it sets aside billions for loan modifications and re-fi’s for people whose mortgage was botched by loan servicers.

Number two: More billions this time as direct payments to homeowners who lost their home, and were hurt by loan servicers. This is what the pros are calling mortage reductions.

Number three: not all the AGs have signed on. Two big players California and New York say the settlement isn't big enough.

Here's what I say. The vast majority of people "harmed" by the bank loan servicing departments were actually simply allowed to stay in their house for free - longer than they might otherwise because they had stopped paying their mortgage.

Harm as a term here is fantasy land.

It's like saying I was hurt by an unexpected windfall of cash... And, look. I understand the banks didn't process their loans correctly (the robo-signing, the document forging) all of that was wrong and in this settlement, the banks are paying for it.

The problem is the "injured" class here got in over their head in debt and is getting away with that error scott free.

Two wrongs here are not making a right.

And the Attorney General plan isn't the only bailout coming.

The President in his State of the Union wants to give homeowners whose homes are underwater $3,000.

Ultimately, his plan is to take that money from mortgage investors.

All of this might make a lot more sense if there had been a program that had actually righted the market.

But none have.

More foreclosures are expected this year than last year.

And the two currently on the table promise to make things worse, not better.

Less than a million homeowners have gotten permanent reductions on mortgage payments under the home affordable mortgage program.

The administration initially projected HAMP would help up to four million stay in their homes.

Housing prices continue to fall - home prices in major markets are down 33% on average from their peak in 2006.

Meanwhile, the national median price has gone nowhere but down.

The new home market continues to falter.

Homes sales are running at a rate of about 4.5 million a year.

There were seven million a year at the top of the market, and a good market is considered six million in sales a year.

Banks aren't going to start writing mortgage loans en masse until they feel like the penalty phase of the mortgage crash is over.

So far, they've been subject to multiple investigations.

Countless hearings have been held on Capitol Hill.

Looming beyond this has been the prospect of a huge expensive settlement, which is what we are seeing today.

Not only will this program likely increase costs for legitimate borrowers as banks seek to pass on costs of the settlement, but all these "free" re-fis and write-downs only means fewer bank personnel available for legitimate loans.

It's time to be realistic.

The housing market is the ultimate too-big-to-bail market.

The government and even the banks don't have pockets deep enough to turn the clock back to 2006. We should stop trying.