Dean Baker
TPMCafé (Talking Points Memo), January 13, 2009

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It's TARP II time and it could be almost as much fun (for the banks) as TARP I. Tough guy Barney Frank is insisting that at least $40 billion of the money in TARP II go to help homeowners. The only problem is that most of the plans on the table for "helping homeowners" actually send checks to banks.

The basic deal is that the government will pay banks above market value for their mortgages so that they will allow homeowners to stay in their homes without foreclosing. While the banks will still take a loss, the government will split the tab in exchange for the banks not foreclosing. Effectively, the banks are taking the homeowners hostage in order to extract taxpayer dollars.

But, we don't have to give in to hostage-takers.

Why don't we require a rule that after we have determined the ransom to be paid the bank, that we just offer the amount to the homeowner and let them decide for themselves what to do? In other words, if we would have to pay the bank $30,000 above market value to buy out the original mortgage, why don't we just offer to hand the $30,000 to the homeowner?

The homeowners would then be free to negotiate themselves with the bank, with their $30,000 in hand. Alternatively the homeowners could just hand back the house to the bank and use the $30,000 to buy a new home, start a business, or whatever else they choose.

Of course it is questionable whether handing $30,000 to homeowners facing foreclosure is the best use of taxpayer dollars. It costs about $3,000 to pay for a year's health insurance coverage in the State Children's Health Insurance Program. This $30,000 handout would be equal to 10 kid-years worth of health care.

We can all have sympathy for people facing foreclosure. But should we hand a family a check equal to 10 kid-years worth of health care, just because they were foolish enough to listen to the braindead policy wonks and ideologues who told them that buying a home in a bubble-inflated market was the best way to accumulate wealth?

The best way to help homeowners is to change the rules on foreclosure, so that they have the right to rent their homes for a substantial period of time. This is the no bureaucracy, no taxpayer dollar path. However, since it doesn't give taxpayer dollars to banks, it is apparently a non-starter in Congress.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.