2009 Homeowner Stimulus Package Is A Waste Of Money

by Mike Holman

Recently I outlined the details of the proposed American homeowner stimulus package otherwise known as the homeowner affordability and stability plan.  This plan will cost about $75 billion and I really have to say that it is a complete waste of money.

What is the package exactly?

Basically this bill will help homeowners who are having trouble paying their mortgage.  There are two groups of homeowners that might qualify:

  1. Mortgage payments and interest rate are too high but can’t refinance to take advantage of lower rates because their house value is too low (ie mortgage is greater than 80% of house value).
  2. Someone who was able to make their mortgage payments but because of a job loss or the payments have increased, they are about to default.

Read about the Making Home Affordable Refinance and Loan Modification Program.

The first group of homeowners will be helped by the government to refinance their mortgages so the monthly payments are lower.  The second group will be helped by having their monthly payments reduced.

Both groups will be eligible for an incentive if they stay current on their mortgage to the tune of $1,000 per year for 5 years.

What is wrong with this?

I have no problem with Keynesian spending which says that you should spend your way out of a recession – but that spending should be applied in ways that make economic sense.  In my mind – helping a homeowner who can’t afford their house is the same as giving bailout money to a car company and telling them they can’t cut any jobs.  It’s also the same as bailing out someone who bought an expensive car when they were working and after losing their job they can’t keep up the payments.  You can’t keep what you can’t afford – some companies have to lay off employees, some homeowners have to sell their houses and some car owners have to get more intimate with public transportation.

The US government is just going to end up paying the mortgage for a lot of people.  I realize that not everyone of those homeowners bought a 6 bedroom house on a $30k salary but even if they have legitimate reasons for defaulting on the mortgage (job loss, medical issues) the principal remains the same.   Stimulus money should go to businesses and people that can use that money to survive and thrive – it shouldn’t go to anybody who “deserves it” just because they have a heart-breaking story.  That money is intended to help the economy and it should only be used for that purpose.

Foreclosures lower property values

One of the justifications (or selling points) for this bill is that foreclosures can lower the property values in a neighbourhood.  That fact is supposed to make people who can afford their house feel better about their tax dollars bailing out their neighbours.  This is a bit silly – if you can afford your house then does it really matter if the value goes down?  Sure, nobody wants to see one of their largest assets go down in value but it’s not exactly a crisis.

What’s with the incentive?

The section of this bill I found most amazing was the part where the homeowner can get $1,000 taken off their mortgage principal each year for 5 years if they stay current on the mortgage after participating in this program.  I don’t get it – the government is already helping them in a big way – if the program is successful and the homeowner stays current then the government gives them even more money?  That makes very little sense – if the program is successful and the homeowner keeps the house then use the incentive money to help someone else.

No accountability

On the surface this bill does make some sense – it will apply to homeowners that for whatever reason are about to start defaulting on their mortgage.  The idea is that if you can help a person who is about to default (vs a person who has already defaulted) you can prevent some foreclosures.  One of the issues which I assume will play a bigger part as time goes on is the circumstances which have lead to the homeowner’s financial problems.

From what I can tell – most of the qualification criteria has to do with whether a refinance or restructure of the mortgage will make the mortgage affordable for the homeowner.  The reasons leading to the financial problems are not an issue.

My question is – if someone is… about the miss a mortgage payment and has 2 new cars in the driveway, 3 flat screen tvs in the house with full cable packages, has a great looking kitchen because they just spent $50k renovating it (or remodeling it as the Yanks say), has a stay-at-home spouse, kids in private school, a house keeper and they use brand name shampoo – should they still be eligible for this assistance?

My conclusions

If I was an American tax payer and didn’t qualify for this program, I would be furious.  As a Canadian, I really hope we don’t see any of this kind of nonsense up here anytime soon.

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{ 24 comments… read them below or add one }

1 Thicken My Wallet

“No, no, dig up stupid!” – Chief Wiggum. That’s the way to get out of this, just dig up…

I suspect you saw this already.

http://www.youtube.com/watch?v=bEZB4taSEoA

2 Maxime Boucher

I absolutely agree, this is an absolute waste of money that rewards the wrong persons. Is there anyone keeping track of the projected american deficit for 2009?

3 Four Pillars

TMW – Hilarous Simpson’s reference.

I haven’t seen that video yet although I’ve noticed it being referenced on other sites. I’ll check it out tonight.

4 My Life ROI

I have been pretty amazed at the amount of people in the PF world who are outright denying that Keynesian economics is one of the best ways to get us out of this mess.

I am glad you raised a valid criticism, though. The spending MUST be constructive.

Bailouts = No
Re-tooling, Re-education, Re-building infrastructure = Yes

Since monetary policy is not going to get us out of this mess we need to look to fiscal policy. Since we are dug so deep purely tax based fiscal policy will not work. We need a well-thought out combination of tax policy and government spending.

Here’s to hoping 🙂

5 Four Pillars

MLR – I definitely believe in Keynesian economics. One point however which I ended up removing from the post, was the fact that you are supposed to run deficits in bad times and surpluses in good times. America has unfortunately skipped the surplus part over the last few years which makes it that much harder to have an even bigger deficit now.

6 Janaki Rathod

Obviously you are not a person who has been professionally employed all their life, who’s retirement savings has been wiped out, is a woman in their 50’s who has been unable to find work for almost a year and who has two kids to support and a mortgage to pay!
If people like me, who have been the backbone of this economy cannot get a helping hand, we are going down baby!

7 Justin

One point about the home value thing that is not mentioned… it makes it harder to sell your house… not just refinance. People are essentially stuck until the market turns around. That kind of stasis is keeping homes on the market longer which also drives values down. It’s not always about refinancing.

8 Vonna

I am all for this bill – my husband and I work – he full time and myself part-time (due to hours being cut way back in Dec 2008). We have no children, but yes we do have two cars that we make payments on and 2 big screen TVs that we paid $100 each for used. We are also paying on student loans (like many other people out there) that were used to better our chances for employment. As of Feb 2009, the ARM came up on our home loan that we have been in 2 years (mind you – my hours have been cut in half). Now we own $500 more a month for the home and according to assessors our home is barley (sp) worth what we paid for so of course we are unable to re-finance (sp). We have always made our payments on time and even early some months – oh did I forget to mention that the original company that we had our loans through went belly up about a year and a half ago so we are unable to go back to them and try to re-finance. Also, just like many other americans out there – our loans are interest only. . .

9 thomas

You had me at the title.

Vonna – Sounds to me like you made some poor decisions and didn’t plan for the future. Not to be rude, but I’m sure you were told how an ARM works. By all the other income qualifiers you listed, maybe getting a house wasn’t the best decision for you.

Some people just aren’t meant to be homeowners.

10 Vonna

I’ve got to be honest with you – when we purchased the home, our loan officer said and I quote “You will have no problem refinancing in 2 years with both of your credit scores being as high as they are and as long as you keep up what you are doing – you will have no problems (we both have credit scores in the 670-680 range)”. Yes, we knew that the ARM was coming up and 6 months before it did was when we started looking into getting it re-financed. As for some are not ment to be homeowners – that it a bunch of … Also at the time of purchasing the home the student loan payments were not as high a month and car payments were also not as high AND we BOTH had very full-time jobs and felt very secure in them but since the economy has turned to … So, now that we are in this situation (due to the current economic downturn), are you saying that it is all our fault and that we do not deserve any help?

11 drew

So not only did you choose a poor mortgage solution you added higher student loans and increased car payments to your debt and now you want your neighbors to pony up and pay for your mistakes. It is not in the constitution that you have the right to own a home at the expense of my paycheck.

12 Vonna

Drew,
I have a question for you – do you own your home out right (no mortgage payments) or do you pay someone to live in that home (rent?). If you own your home out right – that is great but if you rent – did you ever consider that the person that you rent from might be in the same boat that my family is in and that you may loose the roof over your head due to the economy and the fact that for 1 person to servive it takes a 2 person income. Also, your paycheck, does it come from a company that you own (to where you are never going to be afraid of loosing it)? Because, if you are like most people, their paychecks come from someone higher up in the food chain that makes the decisions as to who’s hours to cut. It was not my choice to go from a full (40 hours) time job down to part (20hours) time. Also, it was not my choice to raise my credit card interests (due to the economy according to the statement I got in the mail just yestersday) from 8% to 17.9%, it aslo was not my choice for student loan interest to increase as well. My family did not make poor decisions, we have just been hit with hard times just like many other people. Are you saying, that since the economy has gone to sh.., that I and my family DESERVE to live on the streets instead of asking for help from the government to just lower our interest rate back down to what it was – I’m not asking for a kidney just for our interest rate to go back down 2% points (not for money from your or anyone elses paycheck) if we are willing to do whatever it takes?

13 Ward

ARM=moron.

14 Gates VP

Time Magazine just had an article about this. They study some people in Kansas City, which is like the Winnipeg of Canada. Unobtrusive and cheap.

I’m sure I’ll be making a blog post about this one. But it’s pretty evident from reading it that even the reporter doesn’t understand why these people are losing their homes. That doesn’t really bode well. As far as I’m concerned both of these people should be renting.

15 autumn

This is for Vonna
So you are just a victim in all this? Well that’s what you are saying. Apparently the bad choices you made, specifically the ARM, aren’t your responsibility. And since it’s apparently a fact it takes 2 peoples incomes for 1 to survive (totally out of left field), why are there still plenty of people like me. I have a mortgage that I pay, I have 2 children, am a stay at home mother. So you think my husband must be out making good money somewhere huh?!!! Uh no, we are military, enlisted at that, and in California. Yet we have made well thought out decisions. I thought we all knew, atleast in the back of our heads, that this housing bubble wouldn’t last forever. So I guess I should sit here and feel sorry for you, and sorry for me. Because you haven’t learned from your mistakes, your just the victim…………..

16 autumn

and now my taxes dollars have to help you out.

17 Vonna

Ok, fine, I have made some bad choices but I have also paid my share of taxes (15% each year of MY income for federal taxes alone and 10% of my spouses income plus we have owed the Federal government taxes and paid them faithfully and our gross income is only 55,000 between the two of us so over $13,000 went into taxes just from us alone this last year) so aren’t I also contributing anything to help myself – I guess that doesn’t count for anything ONLY if it is YOUR tax money does it count. I am NOT asking for someone to come in and pay my bills for me just to maybe help negotiate a slightly lower interest rate. I have ALWAYS paid my bills ontime and in full – should I be punished by increases in interest due to those people who don’t? I guess, according to all that have responded to my initial post, I am a immature stupid idiot and will NEVER deserve the right to live like them even though I have gone to college and have worked since I was 11 years old (full time for most of that working period). I purposely don’t have children so that I can get help from the government (which I thought was a smart choice). Maybe I should start popping out childen maybe then I will start getting help? Cause apparently, unless you have children in the world, you don’t deserve to even ask for help little lone get any!!!!

18 Gates VP

Look, @Vonna;

There is no logical way out of this trap, though I understand that you are very angry.

The only good financial decision you listed was going through post-secondary education. Though you don’t list your degrees / careers and 55k combined likely means that you’re still both early in your career.

But let’s cut to the chase, why do you deserve a little help?.

Most people in the world are renters not owners. Why do you deserve a home of your own, when a more skilled worker in India is living in an apartment with their children and parents?

Most families in the world do not own cars, yet you each own one car. Why do you each deserve a car when the Chinese people making them cannot even afford one per family?

I have ALWAYS paid my bills ontime and in full
That doesn’t matter. The bills you were paying were obviously not enough or they wouldn’t be raising your mortgage would they? You just spent a few years paying the “teaser rate”, but the true cost of your bills were much higher.

Look, you made an unsound financial decision buying the home that did at the price and terms that you did. You pay taxes, but so do we, and I’d rather have my tax dollars go towards infrastructure repairs and better schooling for US children.

Yes it would be nice of someone to renegotiate your mortgage, but when you signed the paperwork, you took responsibility for all of these potential problems.
Yes you’re getting less hours, but that was always a risk, right?
Yes the home salesman lied to you wasn’t that always a risk? Have you pursued legal action?
When you signed the credit card statement, you knew that the interest rates could jump on you, right? It’s on the piece of paper that you signed, isn’t it?
Given that you’re only working part-time have you been able to find a different job to make up the hours? Maybe a different full-time job instead? Have you looked? Have you spent 100 hours looking?

…I am a immature stupid idiot…
It’s clear from your posts that you made some questionable decisions. It’s also clear that you resent your situation, but it’s obvious that you signed a lot of papers you probably shouldn’t have. Clearly you need to accept that you are responsible for the papers you signed. Maybe you’re just angry right now, but maturity and responsibility go hand and hand.

If it’s any consolation, lots of otherwise smart people made similar financial mistakes. Just because you made some poor financial decisions doesn’t make you a “stupid idiot”.

Why not look at this positively?

You’re making 55k, you’re both college-educated and you’re living in the US. That alone means that you can afford a nice two-bedroom apartment, a single car, good food and general quality of life that is nearly unparalleled any where else in the world. So all in all you’re doing all right.

19 autumn

HAHA, I didn’t realize taxes were a saving plan, oh wait a bailout!!!

20 Babs

Wow. Are you people all screwed in the head. The stimulus package isn’t realistic. PERIOD. Only in a dream world should those making anywhere from 25,000$ yearly to 200,000$ yearly be itemized in the same package. Bottomline is this… This package isn’t going to help the working man or woman who is lower middle class and middle class, who may be a payment or two behind and who are struggling to make ends meet due to the economy and possibly other various road blocks. Whether it be job loss, disablement, death in the family…it doesn’t matter. Those who receive from the government are those who either are on the upper end of the food chain (and hopefully for you *holes with attitude, you will get yours someday) (There should be no “bailouts” for stock marketers, etc…who are WA WAing, bank accounts should be frozen and homes should be taken for them too ), and those on the low end of the food chain who are druggies, alcoholics, have 10 children, don’t work because they CAN get it from the government (it was the way they were raised and will be handed on down the line), are on SSI because they are obese, etc, etc. That’s the way it is. Those of us, who are working 10, 12, 14 hours a day, sold our 2nd TV and Car, and are struggling to make ends meet will see no actual assistance that will make any big difference. It’s up to us to help ourselves and hope that people who don’t care about anyone but themselves, like Gates, Autumn and Four Pillars ends up in a pit so deep that not even they can crawl out without lowering themselves to cry for help… Help from the government.

21 Are you kidding me??

VONNA THIS ONES FOR YOU…..

I have a question and I want you to answer it honestly. If the “teaser rate” or arm was not available at the time of your purchase and you went on traditional financing would you have been able to purchase and reasonable AFFORD that house? I’m guessing , if you are like a lot of people, that the answer is NO. You simply bought something you couldn’t afford and when the TRUE payment kicked in on the investment, you are crying the blues and using every other excuse as to why to why you can’t afford your house. It is a “look what I got” mentality that lasted a couple years when you weren’t even coming close to being able to afford that house. As far as the other factors such as higher interest rates on your cards etc., they are a direct relation of this mess and your kind of irresponsible buying has gotten us into. Take some accountability and some personal responsiblity already. So you lose your house. There are greater tragedies in the world. If I bought a ferrari and it was a dollar a month for the first two years and then it went up to its normal payment and I could no longer afford it, would no doubt be reposessed. But I wouldn’t be crying that they took my Ferrari. I would actually be laughing that I manipulated the system enough to be able to drive something that I knew was above my means which is obviously what you did with your house. I do not say this to be mean, but I am so sick of people pointing fingers. Also your loan officer SAID he SAID, but you SIGNED!!!—are you kidding me, If I told you cows crap gold bars would you sign for one???? Let’s get serious. I saw your income and I have to say I make substantially more, but do I own a home. NO,,,,,,and do you know why,,,,,,,,because I KNOW I cant afford it. America is on Front street,,but all I have to say is “Look what you got now” crappy credit, and your hand out,,,,,,,,,,,,,,,,,,,,,PS. I would like to thank you as someone who has never been late on a bill in 20 years for my interest rates being laterally increased due to your irresponsibility.

22 Bryin

Vonna- You bought that house when a 30yr fixed mortage was at a historically low rate. If you could not afford the house with the 30 year fixed rate then you could not afford it. I have no sympathy for those like you and your husband. You are getting exactly what you deserve. You complain about high credit card interest rates but it is you that choose to carry a balance on the cards. (Which is NOT the way credit cards were designed to be used) What did you buy with those cards? I would bet that whatever it was it was not necessary. Your bad choices led to where you are at now. NOT the banks, not the mortage brokers, not the gov, no one but you. The sooner you accept that the sooner you can join us in adult world.
If it were up to me, everyone that defaults on a mortage would have to wear a pin for the rest of their lives so the rest of us that were responsible would know who screwed us. We would not be in the mess we are in if you made your payments.

23 Angela

In today’s world one minute you’re making decent money living an average life then the plant shuts down and you can no longer make your mortgage payment your car note etc…BUT does that mean you were living above your means,can you keep that plant from closing some things can’t be helped and to all you insensitive so called humans who find it necessary to kick people when they’re having a hard time just remember what goes around come around find something positive to say.

24 Gates VP

Angela, the big problem here is your opening line: “In todays world one minute youre making decent money living an average life then the plant shuts down and you can no longer make your mortgage payment your car note etc”

It’s not one minute… then the next… .

Look, this is in every major personal finance book out there.
Step 1: eliminate debt and balance the books
Step 2: build an emergency fund
Step 3+: buy stuff & increase emergency fund as necessary

Seriously, if you lose your job and can’t afford your next mortgage payment, then you have to dip into savings / emergency fund. If you don’t have savings to cover at least a couple of months mortgage, then you are seriously under-funded and can’t really afford your house.

You know that you can’t keep the plant from closing, so you have to start by protecting yourself. The emergency fund forms the basis of that protection. There are lots of little things you can do to help offset risks, but the emergency fund is your number one step.

If “one minute you have a job”, then “the next minute you lose your job and can’t make your mortgage” you have failed to protect yourself. You could have picked up basically any one of a hundred different personal finance books / courses. You could have read a few of the hundreds of blogs on the topic.

They all say the same stuff: Emergency fund / cash savings then big purchases. Many of the books / blogs also talk about managing risks. Home purchases are not just the biggest investment most people will make, they are also one of the largest risks people ever take.

So Angela, I do have some nice things to say. I’m sorry. I’m sorry this is happening to you, I’m sorry that we as a society haven’t pushed through the important message about personal finance management. In fact, I’m so sorry that as a US tax-payer (which I am), am proposing (via our elected officials) to help fund the homeowner affordability and stability plan despite all of the things I just said about it being your fault.

(me, I’m 29, make twice the median income for my region. I own neither a car nor a house, so you can see why I’m generally unsympathetic)

My blog has a post analyzing risk decisions in detail:
http://gatesvp.blogspot.com/2009/03/time-has-yet-to-come.html

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