Monday, May 19, 2008

Bill won't fix mortgage mess

Editorial from today's Chicago Tribune:

Paying a home mortgage is not easy for most people—it takes a big chunk of their income, and it means forgoing other spending. But the vast majority of homeowners manage to do it every month. For those people, the U.S. House of Representatives has a gift: the opportunity to rescue mortgage holders who face foreclosure because they took on a bigger debt than they can handle or bet that housing prices would keep rising forever. President George W. Bush has threatened to veto this legislation, and he should stick to that vow. The plan would make taxpayers atone for the sins of the least responsible borrowers and lenders, and it would push the federal government into a dangerously large role in the national housing market. It's been said that a government that robs Peter to pay Paul can always count on the support of Paul. But this time, objections from Peter may stand in the way. A recent Gallup poll, which asked if Americans support "the federal government taking steps to prevent people from losing their homes because they can't pay the mortgage," found 56 percent saying yes and 42 percent saying no—even though the question didn't mention that it might cost taxpayers money. But this package would. The Congressional Budget Office says the tab would come to $2.7 billion over the next five years. Given that information, a lot more of the Gallup respondents would no doubt reject the idea. The gist of the bill is simple: If lenders will agree to cut the balance by at least 15 percent and offer a 30-year fixed rate, the Federal Housing Administration would agree to guarantee repayment. This would theoretically help both homeowners and banks, since both lose in foreclosure. The rest of us are supposed to benefit because the aid would help halt the slide in home prices.In reality, that would be a mixed blessing at best. Falling real estate values are not a good thing for the economy, but they are an essential corrective to the housing frenzy of the last few years, and the sooner they bottom out, the better. Lower home prices will be painful for those who overextended themselves expecting just the opposite. But they will be a blessing to others who were priced out of the market. Once prices reach a new equilibrium, buyers can be expected to jump back in, and banks can be expected to offer financing. That process already may be under way: Mortgage applications jumped nearly 16 percent last week. The truth is, many of the loans eligible for the FHA guarantee will end up going bad anyway—to the detriment of ordinary taxpayers. Alex Pollock, former president of the Federal Home Loan Bank of Chicago, told, "FHA delinquencies tend to be quite high . . . You're in a sector of the market that is by definition risky." And that's before the FHA ventures into this risky new territory. Right now, amid this alleged crisis, more than 95 percent of mortgagees are not delinquent on their loans. This mortgage bill penalizes them for their good judgment and discipline, which is ample justification for the veto President Bush has promised.

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