My parents did not own a house when I was growing up, but we were never homeless. Maybe that is why I don’t see the foreclosures sweeping America’s housing market as a humanitarian crisis, the way the Obama administration does.
Memo to the White House: People can raise families in rented housing without hurting the children or the country.
Last month the administration announced a new set of efforts to stave off foreclosures and to help homeowners whose mortgages are under water. These new additions to the 2009 Home Affordable Modification Program might help President Obama and fellow Democrats build support among troubled homeowners and other middle-class Americans who feel put-upon by forces outside their control. But the plan will not help the overall economy, and it will serve mainly to prolong the pain of a housing downturn that already is three years old. And, in case anyone is counting, it is expected to vaporize $50 billion of the Troubled Asset Relief Program, whose purpose was to stabilize the banking system during the financial panic of 2008 and early 2009.
Under the new program, unemployed homeowners will be able to have their payments lowered for three to six months, during which the companies servicing their mortgages will not be permitted to collect more than 31 percent of their total household income.
The government also will offer increased incentives to companies that reduce principal for underwater borrowers. To qualify, borrowers must live in a home that is worth 15 percent less than the value of their first mortgage and must be spending more than 31 percent of their monthly income on mortgage payments. Banks are not required to participate, but the government promises to make it worth their while if they do.
I am not in favor of deferring foreclosures or reducing principal. Temporary forbearance programs that force banks to accept reduced payments simply prolong the housing slump by preventing houses from reaching the market. This keeps prices from falling to their natural level. Principal reductions, while they bring mortgage values into line with present property values, hand a windfall to people who borrowed more than they could afford to repay. If you have been paying your taxes and your mortgage, congratulations — your tax dollars are being handed to people who have not.
Foreclosing on a home does not mean forcing people out onto the street, since it doesn’t reduce the available housing supply. Foreclosed houses don’t usually get torn down. Rather, foreclosures allow banks to acknowledge and deal with loans that cannot be repaid and get families to move themselves from mortgaged homes they can’t afford into rental houses or apartments they can afford.
Rents are already low and are continuing to fall. The answer for people who lose their homes to foreclosure is to rent, either the same house if they can, or someplace else. Rents paid by tenants are 1.5 percent lower now than they were a year ago, according to a report by Reis Inc. Vacancies remain near 8 percent, the highest level since 1980.
The TARP program, which has been lambasted as a "bailout" for major banks, has actually produced big profits for the government as the banks have exited the program. But instead of using that money to further the economic recovery, the administration wants to use it for yet another poorly-thought-out handout to a favored constituency. This is the same kind of misdirected spending that brought us the first-time homebuyer credit and Cash for Clunkers.
Money we spend today in pointless relief for people who do not need it is money we will not be able to spend tomorrow for people who do. At best, the administration’s latest effort is a misdirected attempt at compassion; at worst, it is an attempt to buy voter support in an important election year. I’m going with a little of both.