Really Bad Financial Advice from Your Congressman

My suggested headline was "Fed Bails Out Bear Stearns -- And John Shadegg Wants You To Help!" but the editor went in a slightly less-assumed knowledge direction. And what does it mean that George Will -- George Will! -- is to the left of the Democrats on the Bear Stearn bailout, with his proposal that any investment bank that wants to get loans from, or guaranteed by, the Fed should limit its executives to the maximum salary for federal civil servants, about $125K per year. Want to pay your people more? Then don't borrow for the government, or you have to pay salaries like the government.

The online newspaper version is here. I recommended adding to my usual author identification at the bottom of the column the additional disclosure that “Of course he’s contributed to Bob Lord, running against Rep. Shadegg. What else would you expect?” But the editor played that straight as well.

WHO NEEDS RETIREMENT SAVINGS WHEN YOU CAN BAIL OUT LENDERS?
East Valley Tribune, Apr. 27, 2008

Rep. John Shadegg, R-Ariz., has a fascinating plan (H.R. 5776, the “Homeowner Empowerment Act”) which he claims will help homeowners facing foreclosure. Fascinating not because it might help homeowners (of course not), but for what it says about Shadegg’s priorities.

Under the proposal, homeowners could use IRAs or pensions to pay mortgages. Taxpayers must repay the money within 10 or 15 years or pay taxes on the withdrawal, but without penalties. Shadegg calls it a “free market” response to the foreclosure crisis.

If by “free market” you mean “unhelpful, impractical, and regressive,” then yes it is. Maybe some homeowners facing foreclosure have plenty in their pensions, but how many? I’ll bet unicorns are more common.

For those with an upside-down mortgage and a well-funded IRA, Shadegg’s bill is bad investment advice. My annual 401(k) statement came with a big warning to diversify my savings, but Shadegg wants people to bet their retirement in not just one asset class, but one specific asset -- their house -- while house prices, he acknowledges, may drop another 15 percent in 2008 and 10 percent in 2009. Enron employees got similar advice to keep their pensions invested in Enron stock, and that worked out just swell.

The bill also would allow the rich to play games. Because of past abuses, people can’t invest pensions in their art collections or personal real estate. Shadegg would change that, allowing people to shift untaxed earnings between their pensions and house. The IRS or pension trustee couldn’t tell whether a person really needed, or just wanted, money for the mortgage. Instead of for retirement, an IRA could be used as an “investment” in one’s “lifestyle.”

Finally, taking money from a pension plan to pay a home mortgage is a bad move for the financially stretched. Retirement plan interests can’t be seized by creditors other than the IRS. Also, Arizona homeowners are protected by our “anti-deficiency” statute, which prohibits a lender from collecting any outstanding balance on the loan after foreclosure. The law is supposed to keep real estate bubbles from forming, because lenders have a stake in reasonable valuations -- but one state statute can do only so much when lenders shed risk by securitizing and selling “stated income” loans (or, more colloquially, “liar loans”).

So Shadegg wants you to use protected assets to pay a non-recourse debt that the lender couldn’t otherwise collect. While a terrible move for the borrower, it’s great for financial services companies. And according to the Center for Responsive Politics, that industry is the single largest source of Shadegg’s campaign contributions. Who could have guessed?

Shadegg calls his plan an alternative to the bipartisan Senate bill, and he’s right that the Senate bill is bad -- but not for his reasons. The Senate bill includes billions in giveaways, like a huge special tax-loss carryback for homebuilders and a tax credit for purchasing foreclosed properties, giving lenders an incentive to foreclose rather than working out loans. Shadegg has no problem with those provisions, only with those (block grants to local communities, raising the FHA loan limit, and funding for counseling for at-risk homeowners) that might actually help homeowners and not corporations.

Shadegg says he doesn’t want to reward “irresponsible” borrowers or lenders, but his response is to oppose anything that helps homeowners -- while showering corporations with tax credits. According to a Google search, he’s had nothing to say about the Federal Reserve bailout of Bear Stearns; apparently “moral hazard” means no help for homeowners, but for big business, gains are private but losses get socialized.

And that’s the point of Shadegg’s “plan.” It’s not supposed to work, or make sense. It’s strictly a vehicle for sound bites, whose sole purpose is to mask yet more GOP “reverse Robin Hood” business as usual -- in this case, “empowering” homeowners to give money to the financial services industry.

That’s Shadegg’s “Homeowner Empowerment Act.” Why let the Fed bail out Bear Stearns alone, when you can use your IRA to help?