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The
Bailout We Need
By
Ted Rall
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 current 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 health-care 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
apparently has 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.
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