This is a calculation I’ve been meaning to do for a while.
According to a Google search, there are 21 million mortgages in the US. Another search says that the average mortgage payment is $1660 per month. (I’m sure these are somewhat inaccurate, but let’s presume they’re good enough for a Fermi calculation.)
Reuters reported yesterday that 7% of these mortgages are past due by one month or more.
So, let’s say we lived in an alternate universe which propped up the banking sector, not by pouring in trillions of dollars at the top and expecting it to trickle down, but by shoring up the assets which turned toxic. How much would that cost?
(21,000,000) * ($1,660) * 0.07 = $2,440,200,000 per month.
That’s billion with a “b”. That’s what it would cost to provide a guarantee to pay off all mortgages for one month; presuming of course that it was an outright government grant. If it were simply a loan, it would cost much less.
Annualized, that’s under $30 billion a year. The TARP funding from September 2008 would have paid for this program for 23 years, 4 months — again assuming that not a single dime of it was ever repaid. I’ve honestly lost track of how many trillions have been committed in total to various bailouts, but if we combine Congressional bills, Treasury programs, and Fed guarantees, but it seems like what we’re spending amounts to a century or so of paying off mortgages.
I’m not proposing this as a solution; my understanding is that this might have worked last September, but once the house of cards was in mid-collapse this wouldn’t have helped. Perhaps not. But this is the first number I’ve come up with that puts the Fed/Treasury/Congressional/Obama plans in perspective — and the numbers being poured into the banks seem, well, awfully high.
Second question — it’s been eight months since September. Wondering why I’m blogging this, instead of pointing to a link that someone in the financial media actually researched and reported in all that time?
Well, a couple of things:
First, I can make your statistics even better by pointing out to you that the typical mortgage payment covers three things: Principal and Interest on the loan, property taxes, and homeowner’s insurance. Only the first one goes to the bank – the others go to the local government and the insurance company.
I don’t know if I’m typical or not, but in my case, the principal & interest represents only 54% of my mortgage payment. So, your $2.4B per month would not only bail out the banks, but would also give the mortgage holder a significant tax break and help out the insurance companies.
So why wouldn’t it work? Because if the government started paying off mortgages that were in default with no penalty to the mortgage holder, I’d stop paying my mortgage immediately. As would a lot of folks, I’d presume. Move that 7% figure in your formula closer to 100% and suddenly the TARP program looks cheap.
Here is a New York Times article about exactly this topic from (ironically enough) October of last year. You’ll note the various & sundry people who agreed with me when the Bush administration proposed almost exactly what you’re proposing (yes, folks, we’re so far through the looking glass that Jeff Porten is proposing that the Obama administration go back and try something that the Bush administation tried and failed).
One other point: even if you structured the law such that the government could magically determine who “deserved” the money and who didn’t, that $2.4B per month would basically be in perpetuity. While it doesn’t feel like it right now, the TARP money will eventually stop flowing out to the banks, and start flowing back in FROM the banks.
Because if the government started paying off mortgages that were in default with no penalty to the mortgage holder, I’d stop paying my mortgage immediately.
You know, Brian, I could be wrong, but I strongly suspect you’re more ethical than that. In fact, I think most people are. If a program were in place for distressed homeowners, I seriously doubt you’d apply for it unless you needed it.
Your argument is the standard bogeyman which is proposed to a) prevent most social aid, and b) which makes sure that anyone who does apply for social services are subjected to massive doses of both shame and verification. Meanwhile, it means that we spend billions of dollars to create a surveillance state on the distressed to make sure no one is cheating.
You’re smart enough to understand that any program of this type could have arbitrary standards for qualifications imposed, and arbitrary means of verification. But personally, I strongly believe that we waste a hell of a lot of money and time, and stigmatize the hell out of a lot of people, with exactly the sort of presumption that our neighbors are all dystopian Machiavellis. Personally, I don’t buy it, and I doubt you do either.
Here is a New York Times article about exactly this topic from (ironically enough) October of last year. You’ll note the various & sundry people who agreed with me when the Bush administration proposed almost exactly what you’re proposing (yes, folks, we’re so far through the looking glass that Jeff Porten is proposing that the Obama administration go back and try something that the Bush administation tried and failed).
For the record: I’m in opposition to Obama’s policies insofar as they seem to be a continuation of Bush’s “prop up the top and hope it trickles down” proposals. I’d have been in favor of any Bush plan to actually start at the bottom and work up — had they ever been put into practice, which they weren’t.
And as for the guy quoted in the article: okay, so he’s on record as saying that he’d be happy to take money intended for the truly distressed. When I was growing up, the word we used for such people was gonif. I suspect that you don’t need to be raised Jewish to have a similar sense of ethics.
even if you structured the law such that the government could magically determine who “deserved” the money and who didn’t, that $2.4B per month would basically be in perpetuity. While it doesn’t feel like it right now, the TARP money will eventually stop flowing out to the banks, and start flowing back in FROM the banks.
So people keep saying — although it seems to me that this is only the case if the plan is ultimately successful. If the TARP/TALF/Fed/free buckets o’ money programs do not hold off the next depression, then it seems to me we’re out every dollar we’ve fronted.
Likewise with my proposal — I’m assuming that it would be structured as a loan, and that there would be defaulters. The difference is that my numbers come out to around $60 billion to date over the last two years, whereas the actual amount of money at risk is closer to 50 times that amount. Yet somehow people think that my idea is riskier — if they’ve considered anything close to my idea at all, which is pretty clearly not the case.
Hmmm….you seen to think I was being theoretical. I wasn’t. If there were no penalty for not paying my mortgage, I wouldn’t pay my mortgage.
You’re only seeing this as “unethical” because of how it’s being couched now (“help for the distressed”), but tax law doesn’t work that way. Something’s either allowed or it’s not.
There are many tax breaks I take from the government every year, even though I could theoretically afford not to take them. I deduct my mortgage interest from my income taxes. I deduct charitable contributions from my income. I put money in my IRA and then don’t pay tax on capital gains until I turn 62.5 and am required to withdraw it as regular income.
All of these laws were originally intended to encourage people to buy homes, donate to charity and save for their retirement. Without them, I would probably have done all three, but that doesn’t mean I willingly turn down money the government is offering me.
I assure you – if the government offered to pay my mortgage for me, there is no way I would say “thanks, but no thanks” and I can’t imagine anyone else would either.
As for TARP/TAFL/Fed/etc. – even if we don’t get back a dime of what we put in, at least we’re done (almost done?) putting in. Your proposal would become a permanent, recurring expense (unless you wrote something into it like “we’ll pay everyone’s mortgage for 5 years and then stop.”)
You’re presuming a level of simplicity (both of me and my proposition) which I don’t think is implied.
I go on the assumption that there would be some sort of mechanism which would attempt to focus the payments on the people who are defaulting. I’m not proposing the mechanism because I’m not in favor of the sort of means-testing and shaming that goes on with many such programs, but most likely it would be something similar. “Demonstrate that your income has dropped”, or “that you have insufficient savings to make this payment”, or what have you. The idea would be to make it sufficiently onerous for people who are looking to save mortgage payments that they could afford to pay.
As for the long-term of the plan, I can think of various means by which this wouldn’t be a permanent handout. First off, make it into another loan — this one payable to the government — and there’s a built-in reason for people to use it only when necessary. Or set it up so that there are limits to what payments are made — someone who can afford 2/3rds of their mortgage, for example, might get a payment only every 3rd month.
We can quibble about this endlessly, which wasn’t my intention. My thinking is that there’s some sweet spot here whereby a much smaller amount of money would be sufficient (or would have been sufficient) to ameliorate the toxicity free fall. You don’t necessarily save 100% of the failed mortgages, and you don’t necessarily bail out 100% of the “deserving” borrowers. But I strongly suspect that it would have landed us in a better place, had it been put into place.
And yes, the fact that I haven’t heard a peep out of Obama’s Treasury along these lines doesn’t please me.
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