US taxpayers bail out California homeowners, as banks fail to pay their share

Voters were misled as California took the unprecedented step this month to give banks and struggling homeowners  up to $100,000 in taxpayer funds to reduce underwater mortgages.  Originally, the banks and lenders were supposed to pay 50% of the cost of reducing the principal for those whose homes are worth less than  their mortgage.  But when the banks refused, California took the controversial step of paying the entire amount, up to  $100,000.


“We thought, you know, 50-50 was much more attractive and we’d have much more  traction with lenders, and it just didn’t turn out to work as well as we would  have liked,” said Diane Richardson, legislative director of the California  Housing Finance Agency.  Fox News

The program is called the Hardest Hit Housing Market fund, and is part of a $7.6 billion federal effort to help underwater homeowners in 18 states.  Of that money, California received $2 billion.  Then when bnaks and lenders who service the loans refused to write down even a small portion of the negative equity loans, California  decided to use the taxpayer money to pay 100% of the mortgage reduction.  But Richard Green of University of Southern California says it’s not what the taxpayers signed up for.

“I think taxpayers would be furious at the idea that everybody gets completely  off the hook for this,” Green said. “There are people that say, look, I’ve been  a renter all these years, I’ve been paying my mortgage all these years, why am I  bailing out these people who made a bad decision? I think the politics of it are  very combustible.”

Fox News

In 2009, Obama and other lawmakers discussed the “moral hazard” such federal programs represented.  It brought up the question whether or not others would take advantage of the plan, allowing someone else to pay the bill.

So as a result of paying 100% of the cost of each mortgage write-down, the number of troubled homeowners  California can help from 25,000 to fewer than 9,000.  Then back in April, Cynthia Romero, inspector general of the TARP program, criticized the Hardest  Hit fund, saying states have misused the money, and she blamed the Treasury  Department for failing to require banks and lenders to participate in the  program before allocating the money to states. She said states lacked leverage  to recruit servicers or banks to play.

Also, California made 2 additional changes to accommodate lenders and homeowners.  The banks will now get 100% of the write-down money in the first year, not in three installments. Secondly,  homeowners will not have to pay back the money if the home is sold at a profit –  provided they make their payment and stay in the home for five years.

This is a far cry from this statement Obama made in April in 2009 in Phoenix:  “So this part of the plan will require both buyers and lenders to step up and do  their part and to take on some responsibility.”  Fox News

The hardest Hit Fund was signed to help those markets where a majority of homes for sale were actually underwater. As of  December 31, just 3% of the $7.6 billion had been spent, and housing prices in most markets have  already begun to recover. Nevertheless, the federal government is not recalling  the money.

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