Monday, April 14, 2008

Housing Handouts

Pretty much everybody and his brother has published an editorial describing one stimulus or another for the housing market. A minority prefer to leave things alone. George Will, on the other hand, takes a middle road, apparently clinging to his belief that a handout is only a handout when it is made to an individual and not a corporation.
Oh? The idea that protracted golden years of idleness are a universal right is a delusion of recent vintage. Deranged by the entitlement mentality fostered by a metastasizing welfare state, Americans now have such low pain thresholds that suffering is defined as a slight delay in beginning a subsidized retirement often lasting one-third of the retiree's adult lifetime.
You know, for a guy who looks like he has never engaged in physical labor in his entire lifetime, Will should give it a try. He's only 67 years old - let's see how well he does when he's pushing something heavier than a pen, for something closer to minimum wage than his sinecures at The Washington Post and Newsweek.
Subprime mortgages are a small minority of mortgages, and only a minority of subprime borrowers are not making their payments. Casting this minority of a minority as victims of "predatory" lending fits the liberal narrative that most Americans are victims of this or that sinister elite or impersonal force and are not competent to cope with life's complexities without government supervision.
This represents Will at his best - half right. I agree with him that most of the people who are in trouble made poor individual choices. But that does not mean that there were no predatory practices by lenders, and it certainly doesn't justify Will's willful blindness toward the massive federal handouts being given to lenders who were much better positioned than any individual to recognize the folly of these loans - yet made them time, and time, and time again. As is his wont, Will also has to wrap his point in a silly smear against "liberals". (But perhaps he's now among those who think of John McCain and G.W. Bush as liberals, so who even knows what that means at this point.)

But I agree with this point, despite its condescension:
The 96 percent of mortgage borrowers who are fulfilling their commitments, often by scrimping, may be grumpy bystanders if many of the other 4 percent - those who found the phrase "variable rate" impenetrably mysterious - are eligible for ameliorations of their obligations.
The proposed "remedies" to the "foreclosure crisis" seem to be taking the form of handouts - either bailing out borrowers who are in over their heads, or subsidizing new home buyers to try to soak up some of the "excess inventory" in the housing market. Picking up where Will left off, David Ignatius presents a "slippery slope" (i.e., logically fallacious) argument as to where this all leads us.
We're now in a comparable cycle of bestowing special economic favors on members of the national family who have been hurt by the credit market crisis. "It's not fair," argue the housing interests and consumer advocacy groups. "Bear Stearns got a financial bailout, so why shouldn't we?" And they're right, by the simplest schoolyard definition of fairness.

So the line grows of people demanding breaks on financial obligations they can't afford. Last week, the Bush administration agreed to rescue 100,000 homeowners who are at risk of foreclosure on their mortgages. Congressional Democrats promptly announced that this wasn't fair enough and that they intended to expand the bailout to as many as 2 million distressed borrowers.

But why stop there? What about onerous commercial mortgages? And credit card debt? And student loans? Why should anyone have to pay back anything? It's not fair
Well, actually, we do have a mechanism where businesses and individuals can escape debts. It's enshrined in the body of the Constitution. It's called... bankruptcy. With some relatively modest tweaking of bankruptcy law, borrowers facing foreclosure can get individualized relief through the bankruptcy courts. The lenders who chose to give them too much money will take a loss, sure, but often less than the cost of a foreclosure. And there is no need for federal handouts to the borrowers.

As for those handouts, some of them inspire the "Say what?" response....
The only solution is for the federal government to offer a temporary 5 percent tax rebate — up to $25,000 — for first-time home buyers.
Here's where the point made by Ignatius and Will kicks in - that proposal is manifestly unfair to responsible borrowers, including first-time home buyers who may have lost part or all of their equity after buying houses they can afford. It also assumes that the problem exists at the bottom of the market. While I don't dispute that there seem to be many areas where foreclosures are affecting large numbers of entry level homes, there are also many areas where even with a subsidy the homes affected are out of the reach of first-time buyers.

I guess the idea is that making homeowners out of a population that has insufficient savings or interest in presently becoming homeowners will reinflate the bubble, such that other owners "get their equity back". But if that works, does it do more than postpone the present market correction? And don't we risk creating a new population of home buyers who don't have the financial stability or discipline to consistently pay their mortgages, setting ourselves up for "foreclosure crisis II"? There's a reason, after all, that lenders traditionally chose not to give mortgages to first-time borrowers who hadn't saved up a down payment, even if somebody else was willing to give them the money. Also, while the subsidy may inspire renters to buy homes, what happens to the vacant rental properties? Higher vacancies usually lead to lower rent, and rental rates typically correlate to housing values.

Meanwhile it does appear that there are individuals and investors who are bargain hunting, raising the question of whether such a subsidy at the bottom end of the market is even necessary.

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