OPINION: The Folly of 'Shared Appreciation' Mortgage Modifications
Fannie Mae and Freddie Mac, the federally regulated mortgage companies that buy two-thirds of home loans in New York, do not forgive outstanding mortgages.
Nevertheless, Governor Andrew Cuomo has introduced a headline-grabbing proposal to expand mortgage relief for underwater homeowners who had been turned down by their banks for principal reduction. He did so without thorough analyses of the cost and implications to taxpayers and businesses.
His Department of Financial Services (DFS) is issuing proposed regulations that would authorize and encourage "Shared Appreciation" mortgage modifications in New York. Banks and mortgage servicing companies will be enticed to reduce the amount of principal outstanding on a borrower's mortgage in exchange for a share of the future increase in the value of the home (if any).
Sound familiar? Yes, Andrew Cuomo is the same politician who violated a basic rule of banking and a market economy when, as Secretary of HUD, he was responsible for starting the subprime meltdown. He declared that "every American should have the opportunity to own a home" and forced Fannie Mae and Freddie Mac to lower their standards for purchasing mortgages which compelled lenders to allow just about every American with a pulse to finance a home purchase well beyond their means.
Andrew Cuomo's plan resulted in economic chaos and the loss of a huge amount of wealth by the middle class and the poor, the meltdown of the American economy and the longest recession in the history of the United States, from which our economy has yet to recover.
In both cases he promotes the notion that Americans don't have to work hard to achieve the better things in life; the government will take care of everything.
His current program looks like, smells like and is an unconstitutional taking from investors without due process. Nevertheless, Guy Watt, President Obama's designee for Secretary of HUD, likes Cuomo's idea and is considering implementing it nationally. Such a program could possibly cause another housing crisis.
Neither Cuomo nor Watt seem to realize that mortgage modifications will take us back to the 2008 housing crisis.
Banks will not accept the new program because the concept is oversimplified and political, in an election year, designed to win the hearts and minds of voters, all to satisfy Cuomo's ambition to be President of the United States. The program presents enormously complicated questions. It is another big government program too costly to implement. It challenges a market economy.
Who decides when the homeowner can sell? A forgiveness of debt is taxable income to the homeowner. How will homeowners pay the income tax? Are these rules applicable to future mortgages? Are mortgages no longer assumable? What about credit ratings and insolvency?
The plan is pure socialism. In an environment when fewer people are pulling the wagon, the middle-class taxpayer doesn't need more burdens.
Carl Paladino is a former New York state gubernatorial nominee and CEO of Ellicott Development.