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Helping the Right 'Homeowners'

A Commentary By Froma Harrop

Tuesday, November 04, 2008

The Treasury Department is working on a $40 billion, $50 billion -- who's counting anymore? -- plan to guarantee perhaps 3 million "at-risk" mortgages. Now that the Wall Street players have been taken care of, the time has apparently come to bail out some little people.

The politics of the day demand it, even if the policy is foolhardy. Unloading troubled mortgages onto taxpayers will keep more people in their houses, we are told. And that will keep house prices from falling further. Perhaps, but what makes real-estate losses more worthy of attention than other financial setbacks?

There have been lots of ways to lose money in 2008. Yet while politicians talk of helping people who gambled on housing, they ignore those who put their chips on General Electric. GE stock is down 50 percent from a year ago.

A hotshot investment banker asserts on NPR that the government must buy up failing mortgages "not to support price but to put a flooring at the point were we believe housing should settle out." Oh? Where do "we" think that point is? One suspects that "we" don't include potential homebuyers.

Right now, housing starts are at a lower level than household formation. In other words, there's a growing demand for those empty houses. And thanks to falling prices, sales of new and existing homes actually rose in September. There obviously is a floor.

Washington should beware playing triage nurse in the mortgage rescue unit. The Treasury has yet to release details of its plan, but any efforts to reduce monthly payments for defaulting homeowners could cause a stampede into the emergency room.

That's because 10 million homeowners are now "underwater." They owe more on their mortgage than their house is worth. People in that situation have a powerful incentive to drop the keys in their lender's mailbox and depart.

But they don't necessarily do that. They may like their house and the neighborhood schools. They may figure that home prices will eventually rise again. So they stay current on their mortgage payments even though they don't have a lot of skin in the game of keeping up.

Now suppose the government has a plan to make payments easier for those who fall behind. See the problem? Responsible homeowners will figure that if they skip some monthly mortgage payments, Uncle Sugar will say, "Uh oh, another underwater mortgage in trouble. Let's help these folks out."

Even though Washington is saving reckless big institutions left and right, let's not totally dismiss the moral hazard issue. There's future danger in bailing out homeowners who didn't fully read their contracts or who pillaged their equity to buy a boat or several years of four-star dining.

If we must choose homeowners to help, let's choose wisely. Start with those tricked into taking out an expensive subprime mortgage when they could have qualified for a prime mortgage. Put them into the more affordable loans that they deserved in the first place.

Change the law to let bankruptcy judges rework the terms of a mortgage on a primary residence. (They can already do that on vacation homes.) This avoids the headache of dealing with the many lenders sharing a piece of one mortgage. And letting bankruptcy courts revamp mortgages will force lenders to carefully evaluate their borrowers. Moral hazard should apply to them, too.

For too long we've been bestowing the honorific of "homeowner" on people who had put nothing down -- or who held zero-or-less equity on their house. They were really just renting from a bank. If some find themselves now renting from a traditional landlord, that's OK. There's no disgrace in that.

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