Homeowners Re-defaulting. I Told You So?
I read a report in Reuters today that was titled "Homeowners Redefaulting After Getting Aid" and I now have the unfortunate right to say to the FDIC, "I told you so."
"We'll accomplish this (the loan guarantee program) at no cost to the taxpayer or the deposit insurance fund. The TLPG is being offered under the systemic risk exception in our statute. Fees for the guarantee have been structured to cover our expected costs. However, in the unlikely event of a shortfall, the difference will be made up through a special assessment on all insured institutions, consistent with the procedure contained in our statute."
A very relevant, yet not widely publicized detail. In this case the taxpayer is saved, new burden for default is put on the already distressed financial sector. So if I understand the reasoning:
1. The banking sector cannot afford the losses they are taking on defaulting mortgages. Therefore:
2. The FDIC will "guarantee" the mortgages. But
3. The guarantee will be paid for by the banks that are FDIC members. Therefore:
4. Banks are again guaranteeing themselves.
Is this madness?! This is not a government guarantee at all, this is spreading the losses out among all banking institutions through a government created utility. I won't even begin to address the free market problems and backward incentive structure this creates, it will have to be put into its own installment. How did this plan get approved?