I understand how you would have compassion for those poor people who got talked into bad loans by mortgage brokers who were primarily interested in making as much commission as possible.  It used to be that the real estate broker filtered out people who could not afford to buy certain homes and the mortgage broker filtered out people who could not afford to pay those mortgages. It used to be that a buyer needed to put a certain percentage down to buy a house. It used to be that if you could pay for a 30-year fixed-rate loan, you could get a 30-year fixed-rate loan.

Things have changed and some people definitely got suckered in.

The Recovery Billions were supposed to be used to buy distressed assets from the banks so the banks could continue lending without having to deal with the ‘distressed assets’. The government would then take over working with the homeowners to help them stay in their homes.

Unfortunately, many of the loans are not ‘assets’ anymore. Some are loans on houses that have been abandoned. Some are loans to people who don’t have a hope of paying even deeply discounted monthly payments. There is also the problem of the steep decline in the values of homes. There are homes for sale on my block that were sold for $600,000 a couple of years ago but have been on the market for months at $400,000 and have no hope of selling because they are only 800 sq ft cottages and should be worth no more than $250,000 if you take their value 5 years ago and apply even a very aggressive price appreciation factor. So, you have a lot of mortgages for $600,000 on houses only worth $300,000. This is a big problem. Why stick the taxpayers with that mess?

If the Recovery Billions are spent on buying these worthless assets, it is just money given to the banks that made these loans, and since the assets are worthless, we would never get that money paid back. If we ‘invest’ in banks, we give them the money to deal with those assets, and part of the deal is for them to pay back the American taxpayer. One of the reasons we are in this financial mess is our government’s willingness to put taxpayer money out to ‘friends’ with no requirement that the money be paid back. These programs always look good because they are couched in terms of ‘helping the poor people who are suffering’, but they really do no such thing.

If the Recovery Billions were spent on buying loans, it would have taken months and $millions to identify the loans to buy and run them through the bureaucratic process.

When we invest in the banks, we are actually strengthening their capital positions which have declined because they have been forced to write down the value of their loan portfolios. This allows them to retain their credit ratings and that allows them to borrow money without paying a premium for declining credit. It also allows them to tolerate the problem loans and work with the homeowners. In other words, it removes the urgency to write off the loans and get them off the books, which makes it possible for the banks to work with the borrowers.