The plan does too little to recognize that many homeowners are living in homes that they cannot afford. In one of the government examples, a family earning less than $44,000 a year has a $213,000 mortgage on a $190,000 house. By any reasonable standard, this family cannot afford that house. It would be far wiser for the government to facilitate the family’s move to rental housing than to provide a short-term subsidy aimed at keeping the family in the home. The plan should have been more forthright in acknowledging that America’s housing mess means new mortgage terms for some and new housing for others.
We should not be helping people stay in their homes if their mortgage payments are at 43 percent of their income. (The bill requires banks, in such cases, to lower interest rates until monthly payments are at 38 percent of income. The government then steps in to lower payments to 31 percent of income.)
The extreme fiscal largesse bestowed on residential housing, directly and indirectly through mortgage interest deductibility, has led to a massive misallocation of investment in the US. There has been overinvestment in the private residential housing stock and underinvestment in just about every other form of fixed capital: infrastructure, public amenities of all kinds (sports facilities, public recreational facilities, parks etc.), commercial structures, plant and equipment. It is time to correct the distorted incentives that are at the root of this misallocation. The easiest way to do this, in the current tax system, is to end the deductibility of mortgage interest in the personal income tax, close down Fannie and Freddie and end the role of the US government in the provision of residential mortgages.
But this impossible dream of re-inflating the housing bubble and making all the wealth reappear is going to die hard. Clever, but stupid, politicians are going to try to convince people that they have plans to make this happen, and they’ll criticize the Obama administration for not getting the job done. It’s important to understand, however, that we’re not talking about real assets that vanished. The houses are still there, and they’re still as good or bad or useful or non-useful as they ever were. What’s vanished is a speculative mania, and public policy can’t—and shouldn’t—create a new one.
February 20th, 2009 at 10:12 am
I disagree with the comments of both Tyler and Ed. What has not been recognized to this point in the crisis is that millions of homeowners were steered towards accepting mortgage terms that were doomed to be troublesome. Many borrowers may very well have been qualified for a mortgage that would have led to a payment near 31% of their income, but either due to the color of their skin or the thirst for profits, they ended up with a loan containing worse terms. We’re supposed to accept the bailing out of banks and lenders who contributed to the crisis while ignoring the needs of everyday Americans. The moral hazard argument from conservatives is a moot point – where is their outrage at the $350 billion handed out the Wall Street execs to date? I say move forward with Obama’s plan – it’s the only one so far that contains any elements of fundamental fairness!
February 20th, 2009 at 12:26 pm
The problem, Kelan, is that people didn’t want the home that only cost 31% of income to purchase. In a bubble, that affordable home was a shack only a decade prior. People bought as much home as possible to reap the most reward from the bubble, not knowing it was a bubble and that it was themselves inflating it.
People were put into homes without down payments and with fancy terms because they wanted to buy into the mania, and taking a year to save up a $20,000 down payment only meant the home was going to cost $30,000 more to buy. Most lenders thought they were helping.
Banks leant out money they new could not be paid back. Mortgage originators made bad deals because they had buyers for those mortgages kwho knew many were bad. There were plenty of bad actors, but the bottom line, I think, is that everyone drank the koolaid in toasting the new paradigm that real estate only goes up. As long as RE went up, everything worked.
February 20th, 2009 at 8:42 pm
The only way for Ed’s and Tyler’s plans to work (which I agree with), is to stop treating “investors” as the enemy. Too many underqualified people got mortgages they can’t afford. They need to stop being homeowners, and start being renters. That requires evil investors to buy a lot of these homes, finally stabliize housing values, and rent the places to others. Until we stop treating these water-carriers (to use Santelli’s term) as the problem, things are going to get worse.
February 23rd, 2009 at 2:02 pm
What about the fiduciary responsibility of the lenders? If non-experts were supposed to have been responsible to understand future economic risks, how can banks responsible to their share-holders for making good use of the monies in their trust, not be culpable for making loans of 100% (and greater) than property valuations?