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March 2nd, 2009 (Modified on April 29th, 2009)

Who’s a “responsible borrower”?

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President Obama’s HASP program promises to help “responsible” borrowers with their mortgage. We’ve already recorded our first impressions about the Housing Affordability and Stability Plan. And last week, we wondered: Will only truly deserving homeowners get help?

Today’s Wall Street Journal has the same concerns:

President Obama continues to insist that only “responsible families” will benefit from his foreclosure prevention program. Addressing Congress last week, Mr. Obama said his plan “won’t help speculators or that neighbor down the street who bought a house he could never hope to afford.” Sorry, Mr. President. It’s becoming increasingly obvious that your plan is going to help tens of thousands of borrowers who put the “liar” into liar loans.[emphasis added]

But let’s assume for the moment that most of the program’s beneficiaries did tell the truth. Does that make them “responsible,” as Mr. Obama says? Many borrowers are underwater, owing more on the mortgage than their home is worth. Declining home prices are of course a big reason. The other big reason is that many of them traded home equity for cash, in some cases several times, while taking on larger mortgages. To say that all troubled borrowers did cash-out refinancings and spent the money on kitchen remodeling, jet skis and trips to Cancun would be unfair. It would be equally unfair to taxpayers not to recognize how common such deals were during the bubble.

While they concur on the ‘fairness’ aspect, they also point out something that should alarm the Obama administration and the taxpayers whose dollars will be used for HASP:

Mortgage fraud exploded during the housing boom and appears to have continued even as home prices fall. In December the Mortgage Asset Research Institute reported that mortgage fraud increased 45% in the second quarter of 2008, compared to a year earlier. The Treasury’s Financial Crimes Enforcement Network reports a similar rise for the full year ended in June of last year. A federal bailout of troubled loans will do nothing to discourage this trend. [emphasis added]

This is not encouraging. The prospect of “free” government money always seems to spawn schemes designed to defraud taxpayers.

The final details of HASP are being worked out even now, and are due to be released on Wednesday, March 4. And even though the FDIC’s Sheila Bair has said that it’s “simply impractical” to evaluate “each and every” loan eligible for the mortgage bailout, we taxpayers should expect (and demand) more than a minimum of due diligence to weed out the undeserving.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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