Obama's Housing plan and the Responsible Renter

There is a cry of injustice in the air.

This is from people who have been responsible renters. They question the fact that they are being asked to bailout irresponsible homeowners who have bought larger homes than they can afford and are now going into foreclosure. They point out the unfairness of Obama's housing rescue plan to people who have been renters . They aver that it is better for home prices to fall due to foreclosures, so that finally, they too, can afford to buy homes that they can now afford.

A completely fair question. A very fair concern. And a very fair free-market expectation.

Let me see if I can help address this concern. Before I start to make my point, I want to clarify: I do not personally stand to gain from Obama's Housing rescue plan. Not a cent. While I am not an Economics expert, I do try to see both sides of the coin and am trying to look at the economy as a whole.

This downturn has affected all of us and is a danger to this country's long term stability. From that standpoint, it is important to go to the source of what started off this cascading disaster. The subprime loan fiasco and the foreclosure of homes has been identified by experts as the root cause of this economic meltdown. So, it makes sense that we fix the cause and not the symptoms of the illness.

Job losses, failing banks and auto companies, unemployment lines, disrupted children and families, increase in number of people without health care... all these are symptoms of the disease that has taken hold of our economy. The root cause is the housing market collapse.

As long as most people were diligently paying their mortgages, the banks continued on their merry route to making more and more money. Everything was fine. The sun shone.

As the subprime market started to melt, we felt the first tremors of the housing market. Like any untreated illness, the disease soon spread to other areas and now we have otherwise healthy mortgages failing, sometimes due to a job loss, sometimes due to forces beyond a homeowner's control and sometimes due to the sheer irresponsibility of being overextended on debt. As more and more homes started to foreclose, it brought home prices down all across the country. Responsible homeowners were now upside down on mortgages that they have been paying diligently. They owed more than their house was worth. And so began more defaults leading to the avalanche of sliding home prices.

In order to staunch that bleeding, the Obama administration has correctly addressed the root cause: stem the foreclosures.

But what does that do for renters?

Now, there are two types of renters: ones that will probably always rent their whole lives for a variety of reasons - maybe they are nomadic, or they love the freedom of not being tied down to a home or they choose to rent for a variety of economic reasons. The housing meltdown does not affect them significantly, other than the fact that their rents probably came down a bit - they now have more bargaining power because there are many more homes for rent in the market.

The second kind of renter is the one who, with the falling prices, can now finally afford to buy a home. These are the people who have protested Obama's Housing rescue plan vociferously. They feel they can now finally afford a home because home prices are where they should be.

Nobody is arguing the validity of their point.

But here is my opinion: if a renter can now finally afford to purchase a home, there is no dearth of foreclosed homes to purchase. Allowing foreclosures to continue unchecked will cause great danger by letting the markets go into a free-fall until the entire economy collapses. And a collapsing economy will certainly hurt everyone. Even though a renter can finally afford to purchase, he/she may not be able to get a loan as banks which have been singed by defaulting homeowners will now be extra careful about giving loans to new homeowners. In addition, even if banks are willing to lend, they do not have the money to do so.

This situation reminds me of the "dog and pebble" story that Indians love to tell - When one finds a stray dog and wants to aim a pebble to chase it off, one cannot find the right sized pebble. And if there is a right sized pebble, a stray dog is nowhere in sight.

Likewise, this feeling of being able to take advantage of the foreclosure market. Homes are now available and affordable, but loans are harder to get. And with more homes being foreclosed, the cascading effect on the economy as a whole, is terrible to contemplate.

So, Renters! The govt. is not just using our hard-earned tax dollars to benefit irresponsible homeowners. The dollars are actually being used to prop up our economy by fixing the root cause of the disease, so that we all may have jobs, stable homes and health care.

Foreclosures are a lose-lose for EVERYONE - homeowners, lenders, banks, renters and new purchasers. If we take a step back and look it from a bird's eye view, we will see that Obama's plan, while not perfect, will eventually help prop up the economy, IF carried out without interference from vested interests.

But that's a big IF.