Treasury Secretary Paulson made a long winded and disingenuous speech on the U.S. Housing and Mortgage Market before the National Association of Business Economists. Let’s tune in to the highlights:

Today, 93 percent of American homeowners – 51 million households – pay their mortgages on time. Many are on tight budgets, sacrificing other things in order to make that payment. Only 2 percent are in foreclosure.

Most of the proposals I’ve seen would do more harm than good — bailing out investors, lenders or speculators who, instead of getting a free-pass, should be accountable for the risks they took. Let me be clear: I oppose any bailout.

Translation: Paulson opposes any bailout except for the bailouts he personally sponsors. See point number 1 of last Thursday’s Five Things Paulson Urges Bailout, Dismisses Bailout for more on Paulson’s personally sponsored bailouts. Also see Poole, Paulson, Bernanke on Bailouts for Poole’s objections to bailouts because of moral hazards.

Second, this is a shared responsibility of industry, government and homeowners. We in government are working to expand options through the FHA, and we’ve worked with the industry to reach as many homeowners as possible to let them know that help is available. There is more that government and industry can do, and our efforts will continue to evolve.

Translation: We are attempting to bail out the banks, as much as possible, by shifting the risk to the FHA where taxpayers will be expected to pick up the costs.

Third, the current public discussion often conflates the number of so-called “underwater” homeowners – that is, those with mortgages greater than the value of their house – with projections of foreclosures. Let’s be precise: being underwater does not affect your ability to pay your mortgage, nor create a government responsibility for assistance. Homeowners who can afford their mortgage should honor their obligations — and most do.

Homeowners who can afford their payments and don’t have to move, can choose to stay in their house. And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator – and one who is not honoring his obligations.

Translation: Paulson is attempting to play a “morality card” when banks showed greed, not morals by making loans they had no business making in the first place. Furthermore, Paulson and banks are showing no morals by asking for bailouts from taxpayers. Obviously, morality is a one way street for Paulson.

Morality vs. Business Decisions

But this is not about morality at all. This is about business decisions. See Moral Obligations Of Walking Away and The Business of Walking Away for more on the morality vs. business decisions.

In a nutshell, banks made business decisions to lend money to people to buy houses that banks knew people could not afford. Banks also made business decisions to lend with no money down. Banks knew there were risk to these strategies but they took the risks anyway.Those were bad business decision for banks. Banks, not taxpayers should pay the price.

Paulson is now begging people to do something that may not be in their best interest to do. My recommendation is simple. If it benefits you to walk away, then walk away.

Note too that walking away is not one sided. Banks and businesses “walk away” all the time when it suits their best interest. Deals are being broken as I type and banks are paying breakup fees. See Businesses Advised To Walk Away for more on this topic.

The “breakup fee” for homeowners walking away is a bad mark on their credit report and loss of their down payment. In many cases the down payment was zero. Banks have only themselves to blame for setting the breakup fee too low.

Bubbles, greed, and bailouts, not walking away, are the real moral hazards. And if enough people do walk away (forced or unforced), banks will be more careful about who they lend to next time and what the breakup fees (down payments) need to be. If and when banks (and the Fed) are more careful, fewer bubbles will get blown, and the better off we all will be.

Mike “Mish” Shedlock
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