Lower Prices and More Foreclosures Will Solve Housing
A Commentary by Lawrence Kudlow
With everybody focused on Obamacare, and its new entitlement spending and taxing, the administration has tried to sneak in yet another bailout for housing. Yet again, Team Obama is rewarding reckless behavior, punishing the 90 percent of responsible homeowners who are making good on their mortgages, and setting up a greater moral hazard that will surely lead to an expansion of bailout nation.
I'm talking about an add-on to HAMP, the $75 billion Home Affordable Modification Program, which has been a dismal failure. In fact, the entire foreclosure-prevention effort -- including forgiveness of mortgage-loan principal -- has been a failure.
The Office of the Comptroller of the Currency reports that nearly 60 percent of modified mortgages re-default within a year. And now comes a new brilliant idea that if you live in your main residence, have a mortgage balance of less than $729,750, owe monthly mortgage payments that are not affordable (meaning greater than 31 percent of income) and demonstrate a financial hardship, the government will subsidize you by offering TARP money to banks and other lenders to reduce your outstanding mortgage balance.
Former Bush administration economist Keith Hennessey highlights the outrage that Team Obama would actually subsidize people making up to $186,000 a year who have a mortgage balance of over $700,000. This isn't even a middle-class entitlement. It's an upper-middle-class entitlement. Actually, at $186,000, it's virtually a top-earner entitlement, according to Team Obama's definition of rich people eligible for tax hikes.
I mean, for a measly $14,000 more in income, the White House will jack up your top personal tax rate and your capital-gains tax rate. But now, for just less than $200,000, you get a brand new spiffy forgiveness plan for your mortgage.
It's a complete outrage.
I don't want you to pay for my mistakes. And I don't want to pay for yours. That's an oft-heard Tea Party complaint, and it's a good one. Why should the 90 percent of folks who make good financial decisions on their homes have to pay for the 10 percent who did not?
Or, put it another way, just because a home loan is "underwater" -- meaning its value is lower than today's current market price -- why should a responsible person whine about it and walk away? Why not service this loan for the longer term and wait for prices to improve? That's called personal responsibility.
Bloomberg financial columnist Caroline Baum argues that lower home prices are the key to solving the housing problem. Popular blogger Barry Ritholtz says we need more foreclosures, not fewer, to solve housing. Both are correct.
Even in the foreclosure process, young families can come in and snap up cheap homes. This is a great boon to the new generation.
And take a look at places like California, Florida and Las Vegas, where foreclosure activity has been high and prices have fallen the most. What you see is a sharp pickup in home sales, which is steadily clearing away the price-depressing inventory overhang of unsold homes. In other words, market forces work.
Bouncing from pillar to post, the White House has unsuccessfully tried mortgage modifications, foreclosure abatements and tax credits. None of it has worked. But the price tag so far for these failed government interventions in the housing market is $75 billion and rising.
Applying TARP money to the housing problem -- originally meant for banks -- is an even greater outrage. TARP should be closed down, now that banks have repaid it, and turned back to taxpayers in the form of government debt reduction.
But the Obama White House rejects market forces. It rejects free-market price adjustments. As a result, it is creating a crazy subversion of normal incentives.
Obamacare -- with its unwillingness to put to work true free-market and consumer-choice competition to hold down health costs -- will turn out to be a failure. And so will Team Obama's clumsy and clunky attempts to substitute government subsidies for free-market home pricing. The failed government subsidy for housing is a leading indicator. Imagine, putting more and more middle- and upper-end income earners on the government dole.
As America's nanny state grows larger, its economy will grow weaker.
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