Slutty TARP Getting Hit On Right and Left

Isn't it about time the government made an effort to explain to the public the necessary $150 billion going into the firm A.I.G.?  Given the mal-explained situation at hand, the tendency is for the casual observer to assume that if American International Group--an evil insurance company--gets saved, surely the auto companies and other industries ought to be helped.

In terms of icons, it's easy to visualize the hard working midwesterner who is doing an honest day's work for a day's pay building your ram tough pickup; the man who is just trying to provide a pool for the kids and meatloaf on the table and a trip to Disneyland every fourth year. We like our cars, and we like the concept of "hardworking American," though it's not so elastic a concept as to extend to our local insurance guy. Too many people, most of the time, assume that the insurance industry in its various forms is profitable beyond reason, and secretly ripping everyone off. That would be wrong of course. But don't let the populararity of our former potential vice president (in Palin) lend any doubt to the desire for a huge mass of people to accept simplicity in place of complexity. So the reality of what AIG means to the financial system and America's health gets lost.

Thus, with the singular focus on "fairness," and not wanting to appear to help special interests, or explain tough concepts to the masses, the Feds are moving both toward helping out the auto industry (again) and redefining for the upteenth time a plan to assist the average homeowner. This new plan, announced yesterday, is designed to speed the process of helping Joe Homeowner (with all that implies).

Under the program, Fannie Mae, Freddie Mac and other companies would move to modify mortgages for borrowers who are more than 90 days late on paying their loans and fit within certain formulas. That contrasts with the current system, where modifications are addressed on a case-by-case basis.

The goal of the new program would be for borrowers' annual mortgage payment to equal 38 percent of annual income, the model used successfully by the government when it took over IndyMac in California. The companies would do that by extending the loan term, reducing the interest rate and, if necessary, delaying payment on a part of the principal of the loan. If a borrower is able to meet payments for three months, the change would become permanent.

(Washington Post)

We assume the government will put in place the type of safeguards to avoid abuse of the program, though Dealbreaker seems to think otherwise:

2. Putting the power for participants to qualify themselves for the program by merely ceasing to pay their mortgage payments for three months, making any due diligence on your part impossible by "fast tracking" decisions, especially where the program's benefits include:
A. Lengthening the loan term;
B. Reducing the interest rate, and;
C. Deferring payments until the loan is 38% or so of gross household income,

will expand the programs size to roughly every mortgage in the United States.

and

3. Any hope of securitizing mortgages cost-effectively after this program is doomed to failure.

These points are certainly a worry. If a certain percentage of homeowners were not essentially honest or financially astute the first time around, we hardly expect a violent shift in human nature now.  We also don't assume that the other legs of the problem (Congress, mortgage brokers, the Fannies, mortgage insurers) can be counted on to do what needs to be done to fully cherish and preserve taxpayer funds. The fundamental issue is that prices are not where they should be, and no amount of tinkering is going to restore that, though that seems to be a desired result of many. One hears the phrase, "stabilize prices" quite a bit, which is wishful thinking.

The Wall Street Journal also brings up the issue of moral hazard.

A bigger worry could be that these modification programs are too effective. In that case, "many current borrowers will wave the white flag of surrender and also try to get a modification," Rod Dubitsky, a senior strategist for asset-backed securities at Credit Suisse, wrote in a recent report.

The danger is that loan holders who otherwise could meet their payments would decide to fall behind to get their cut of the bailout. That could unleash a chain reaction that drives default rates even higher.

That means another dose of moral hazard. Federal officials stopped worrying months ago about that for companies, as they piled up bailout upon bailout to keep the financial system from collapsing. Now officials risk injecting warped incentives into the behavior of individuals.

And just how far will these T.A.R.P. (Trouble Asset Relief Program) funds go anyway?  It's about time someone started saying saying "no" with a little dignity and restraint.