Tuesday, December 1 , 2015, 8:17 pm | Fair 50º

Larry Kudlow: Why Subsidize Bad Behavior?

Obama's rush toward a nationalized mortgage market is not the American way.

By Larry Kudlow |

President Obama’s massive mortgage-bailout plan is nothing more than a thinly disguised entitlement program that redistributes income from the responsible 92 percent of home-owning mortgage-holders who pay their bills on time to the irresponsible defaulters who bought more than they could ever afford. This is Obama’s spread-the-wealth program in action.

Larry Kudlow
Larry Kudlow
Team Obama is rewarding bad behavior. It is enlarging moral hazard. It is expanding its welfarist approach to economic policy. And with a huge expansion of government-owned zombie lenders Fannie Mae and Freddie Mac, Team Obama is taking a giant step toward nationalizing the mortgage market.

Reporting from the Chicago commodity pits, my CNBC colleague Rick Santelli unleashed a torrent of criticism over this scheme. Santelli said: “Government is promoting bad behavior. ... Do we really want to subsidize the losers’ mortgages? This is America! How many of you people want to pay for your neighbor’s mortgage? President Obama, are you listening? How about we all stop paying our mortgages! It’s a moral hazard.”

All this took place on the air to the cheers of traders. Click here to view the video. Santelli called for a new tea party in support of capitalism. He’s right.

Obama’s so-called mortgage-rescue plan amounts to $275 billion in new debt that will have little if any lasting impact on deeply corrected housing prices or the mortgage-default problem that stemmed from the insistence of government to throw home loans at lower-income people. A modest reduction in mortgage rates will have little impact on home prices, as Harvard professor Ed Glaser has shown. And by the way, re-default rates on modified mortgages have been running 50 percent to 60 percent. This is not going to change. So why should we throw more good money after bad?

Meanwhile, Wall Street is awakening to the disappointment that the securitized mortgages behind the toxic assets that have done so much damage to banks and the credit system are not being treated in the Obama program. The oversight is incredible. There are no safe-harbor provisions to protect mortgage servicers against lawsuits if agreements are broken. The ownership of these securitized mortgage pools is wide and far, spanning the globe. Breaking contracts is exceedingly difficult, especially without any legislated legal protection.

Of course, banks that have whole loans can choose to modify them if they want. And in some cases it’s much better to modify than foreclose. But 70 percent of this bank-owned paper is performing. It’s the securitizations that have clogged up the world credit system.

Then there’s the bankruptcy-judge cram-down, which would allow the courts to renegotiate interest rates and loan principal. This would abrogate private contracts and throw out the rule of law. Do we think future investors will put up mortgage capital if they fear judges will overturn the terms of contracts? Home-loan supplies will fall and mortgage rates will rise.

Then there’s Fannie and Freddie, the big winners here. Only their products are eligible for mortgage relief. Jumbo mortgages are not. Neither are private-label mortgages created by various nonbank lenders. Fan and Fred already run 48 percent of the mortgage market. Obama’s proposal would greatly enlarge that and move the mortgage system toward government nationalization.

What’s even more incredible is Team Obama’s stubborn refusal to have any faith in the free market. In some of the hardest hit areas of the country, markets are already solving the housing problem. Writing on his Carpe Diem blog, University of Michigan professor Mark Perry notes that while California home prices dropped 41 percent in 2008, home sales in the state jumped 85 percent. It now looks like 2008 sales for single-family houses will exceed levels reached in 2007.

What’s more, the unsold-inventory index for existing single-family detached homes in December was 5.6 months, compared with 13.4 months for the year-ago period. And the median number of days it took to sell a single-family home dropped to 46.1 in December, compared with 66.7 in December 2007. So inventories are dropping, the number of days to sell a home is falling, and sales are rising in the wake of lower prices.

If the government really wants to help, instead of bailing out irresponsible mortgage-holders, it should support new and younger families who want to buy starter homes and begin to climb the ladder of prosperity.

All this is free-market economics 101. And I say, let free markets work. Let’s remember that most folks — even those with underwater mortgages, where the loan value is more than the home value — do not walk away from their obligations. They don’t want to wreck their credit — and their homes are their castles. That’s the American way.

But if we penalize the good guys and subsidize the bad ones, we are undermining the moral and economic fabric of this country.

Larry Kudlow is the founder and CEO of Kudlow & Co. LLC, an economic research and consulting firm in New York City, and host of CNBC’s Kudlow & Company. Click here for more information, or click here to contact him.

comments powered by Disqus

» on 02.20.09 @ 02:27 PM

So why did we subsidize bad behavior with the banks? I think we have to be careful here. The first stimulus package gave large sums of money to the banks without condition. They turned around and used the money for bonuses and to upgrade office furniture. Now when we are talking about John and Mary Smith the homeowner there is a moral harzard issue? I agree that some homeowner were gambling and knew what they were doing and others did not and got into a situation they had no control over. But please lets be consistent!!!

» on 02.21.09 @ 12:23 AM

“President George W. Bush may turn out to be the top economic forecaster in the country” - Kudlow, 2008.


Just another GOP shill. Didn’t mind the bank handouts but doesn’t like this handout because he suddenly had a change of heart, now it’s small government time!!

» on 02.21.09 @ 02:19 PM

What did your mama tell you!! Two wrongs don’t make a right. I agree that the entire bail out should have gone to mortgage holders who were caught by the bubble burst. Let the damned banks fail and have smarter institutions pick up the pieces, rather than reward wall street fat cats while mom and pop seek shelter in a cardboard box.

» on 03.02.09 @ 09:15 AM

Here are my two questions for you:

1) Instead of tax breaks on new cars, should the government guarantees or backup all new loans or lease on new equipment’s or fuel efficient car’s & SUV’s with 20 mpg or higher?

(That will help the US reduce up to 40% on fuel consumption and at the same that will create sales tax for the cities, save the cars industry, create new jobs and accelerate the economy without bailout.  And based on my personal study, new car owners usually goes out more frequently and spend 2-3 times more than before specially on new clothing, movies, restaurant, malls etc….  And as you can see the risks are very small, but the benefits are greater).

2) There are millions of Americans just like me that would like to donate directly to the government at least $100 to help pay off America’s, What can I do?

Thank you!

Serge P.
West Palm Beach.

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