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Should Congress Let Home Prices Fall ?

Sunday, June 29, 2008 | 05:30 PM

in Credit | Economy | Real Estate | Taxes and Policy

"Recent reports about falling home prices have rallied support for the plan." [Rep. Barney Frank, Democrat of Massachusetts] acknowledged that the plan may not do enough to help homeowners or the housing market. Mr. Frank, chairman of the House Financial Services Committee, said that even after a bill like this, “you may need more.”

Stark housing numbers are coloring the debate in Congress regarding the impending Housing bailout. As of the most recent data, there are more than three million borrowers in "distress" -- typically, 60 days late in mortgage payments -- and analysts forecast a couple of million more will fall behind on their payments in the coming year. Let's ballpark it as 3 million people in some stage of delinquency, default or foreclosure -- and that number may likely go to 4 - 5 million over the next 24 months.

Hence, you can understand the knee-jerk reaction of politicos who are looking to do something(anything!) so they can tell their districts why they should be re-elected. -- even if it ultimately makes the situation appreciably worse.

What I find astonishing is that Congress somehow believes they need to do something to help prop up housing prices. When it comes to free markets, the quadrennial Socialists in Washington talk a good game, but push comes to shove, they don't really believe it.

Its the same with half of the "Free-market" pundits on T.V. As long as things are going well, they want no supervision, no regulation, no interference with markets. As soon as the going gets tough, they come crawling to mummy and daddy for a bailout, begging for all sorts of FOMC and government intervention. Hypocrite is too soft a word for this ilk.

Back to Real Estate: Housing prices went ballistic thanks to the credit bubble. If you lend money to anyone regardless of their ability to repay it, you end up with enormous price distortions on that market. Home prices should be allowed to normalize on their own. This will actually be good for the economy, make housing more affordable, and speed up the process of market repair. (I'll have more on this subject later this week). The alternative -- not taking the write-downs, propping up market prices artificially -- damned Japan to a decade plus long recession.

Instead, what we get instead is a giant bailout -- a handout to borrowers who foolishly bought homes they could not afford, and an even bigger handout to banks & mortgage firms, who recklessly lent money to people who now cannot afford to pay it back. This bailout will only serve to keep prices artificially too high, and to encourage more recklessness in the future.

Via the NYT, here's the Ubiq-cerpt:™

"Those stark numbers not only illustrate the challenges for the lawmakers trying to provide some relief to their constituents but also hint at what the next administration will be facing after the election. While the proposed program would help some homeowners, analysts say it would touch only a small fraction of those in trouble — the Congressional Budget Office estimates it would be used by 400,000 borrowers — and would do little to bolster the housing market.

Other proposals that have been floated in Washington include expanding the current plan to make it mandatory instead of voluntary for certain home loans; having the government buy loans outright from lenders; and providing some way and some incentives to let homeowners become renters in their own homes.

But not everyone supports government interventions. Some Republicans, like Senators Jim DeMint of South Carolina and Jim Bunning of Kentucky, say the proposal would use government subsidies to bail out reckless lenders and borrowers. They suggest that the housing market will correct itself more quickly if Congress does not intervene.

The biggest impediment to helping homeowners is the weak economy. In addition to falling home prices and risky loans, homeowners are now confronting a tough job market. The unemployment rate has risen to 5.5 percent, up from 4.9 percent in January.

To take part in the proposed program, lenders would have to lower each debt obligation to 85 percent of the home’s current value. Borrowers would stay in their homes but would have to pay a 1.5 percent annual insurance premium. If homes’ values grow and borrowers sell or refinance, they would have to share the gain with the government.

The program would be managed by the Federal Housing Administration and paid for by the insurance premium, as well as a 3 percent fee paid by lenders and a tax on Fannie Mae and Freddie Mac, the government-sponsored buyers of mortgages. (The refinance proposal is part of a broader housing bill that would also overhaul laws relating to the two companies and the F.H.A.)"

Source:
As Housing Bill Evolves, Crisis Grows Deeper
VIKAS BAJAJ
NYT, June 29, 2008
http://www.nytimes.com/2008/06/29/washington/29housing.html

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