Government: punishing prudence and rewarding irresponsibility

Uncle Subprime

Excerpts:

Mr. Frank's idea is that, for mortgages originated between the start of 2005 and mid-2007, a lender and borrower would be able to agree on a federal refinancing plan. Lenders would have to write down their loan to no more than 85% of the current appraised value of the property – which means the banks will use this opportunity to unload the biggest stinkers in their loan portfolios.

For the borrower, the deal is even sweeter: a low fixed monthly payment and a reduction in the principal to market value. The Federal Housing Administration would then guarantee the loan, up to a total of $300 billion in total Frank Refis. The deal is so sweet that even Mr. Frank is concerned that otherwise reliable borrowers may "purposely default" to be eligible for assistance. His solution is to require borrowers to "certify" that they really, truly aren't doing this simply to get on the taxpayer gravy train.

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In sum, Mr. Frank is volunteering U.S. taxpayers to insure $300 billion in mortgages with underwriting standards to be named later. Connecticut Senator Chris Dodd thinks $400 billion is more like it. Quavering Republicans should do the political math. The Mortgage Bankers Association tracks 46 million mortgage borrowers, and 42 million are paying on time. More than 20 million households own their homes outright and, having worked for years to pay for them, probably don't want to pay for someone else's. Neither do 35 million renters who didn't take a flyer on nicer digs.



Robert J. Samuelson: How Not to Save Housing

Excerpts:

No reasonable person takes pleasure from seeing people lose their homes, and Congress is understandably upset. Estimates of defaults in 2008 run up to 2 million. If realized, that would be roughly twice the 2006 level and about 2.7 percent of the nation's 75 million owner-occupied homes. It would be the highest rate since World War II but well below much higher rates during the Great Depression, says economist Kenneth Snowden of the University of North Carolina at Greensboro.

The best-known congressional proposal comes from Massachusetts Rep. Barney Frank, chairman of the House Financial Services Committee. (The Bush administration is reportedly considering a similar plan.) Frank's plan would authorize the Federal Housing Administration to guarantee $300 billion of new home loans to strapped homeowners, allowing them to refinance their mortgages at lower rates and reduce outstanding amounts. Under the plan homeowners who borrowed between Jan. 1, 2005, and July 1, 2007, would be eligible for new loans if their monthly payments of interest and principal exceeded 40 percent of their income—well above a more prudent level of 30 percent.

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Everyone wins from this arrangement, say its supporters. Homeowners—some of the victims of deceptive lending—stay in their houses. Neighborhoods don't suffer the potential blight of numerous foreclosures. Housing prices don't go into a free fall, depressed by an avalanche of foreclosures. Although lenders take a loss, the losses are lower than they would be if homes went into foreclosure. That's a costly and lengthy process that can involve losses of 50 percent or more.

The Frank proposal and others like it put politicians on the barricades, trying to protect needy homeowners. The imagery is flattering. But there are two glaring problems, one moral, the other economic.

About 50 million homeowners have mortgages. Who wouldn't like the government to cut their monthly payments by 20 or 30 percent? But Frank's plan reserves that privilege for an estimated 1 million to 2 million homeowners who are the weakest and most careless borrowers. With the FHA now authorized to lend up to $729,750 in high-cost areas, some beneficiaries could be fairly wealthy. By contrast, people who made larger down payments or kept their monthly payments at manageable levels would be made relatively worse off. Government punishes prudence and rewards irresponsibility. Inevitably, there would be resentment and pressures to extend relief to other "needy" homeowners.



Comment: Every parent knows that sometimes one can be "too good" to children. Examples would be shielding them from financial realities to the point that they do not learn to be fiscally responsible adults. It's also possible for government to be "too good" to the point that it "punishes prudence and rewards irresponsibility". These 2 articles highlight that danger.