Housing Sense in Congress?
Presidential candidates insist that Washington needs fixing, and we in the commentariat love to expose hypocrisy, pork-barreling and gridlock. So it feels awkward to admit the truth about the subprime meltdown. First Congress produced a timely and well-crafted stimulus. Now it is working on proposals to help homeowners, and with one ugly exception, the recommendations are sound.
Why, you might ask, even bother to help homeowners? They have no moral claim to government assistance. People who are falling behind on their mortgages generally aren't poor, since the poor tend not to buy houses in the first place. They generally aren't deserving, since they chose to take on mortgages they could not afford. When thousands of needier Americans languish on the waiting list for housing assistance, there's no compelling case for lavishing federal dollars on the profligate middle class.
But there is a case for preventing profligates from harming bystanders. When homeowners fail to pay their debts and go into foreclosure, their homes stand empty and attract looters and squatters, dragging down the value of neighborhoods. Falling home prices depress consumer spending; the economy gets rockier, driving home prices down further. It is this threat of a negative spiral, not sob stories from homeowners, that warrants limited federal assistance to families facing foreclosure.
Of course, some fall in house prices is necessary. But absent federal action, market failure will cause real estate to fall further than the basics of supply and demand would justify. In a healthy market, foreclosure would be rare, because it pays for a lender to forgive, say, 20 percent of a loan rather than booting the homeowner out and seeing 30 percent of the property value evaporate in the process of eviction. But because mortgages have been sliced up and distributed among far-flung investors, it's difficult to get their consent for partial forgiveness. Homeowners get dumped on the street, and more value than necessary is destroyed.
So, although Congress would be wrong to launch a broad attempt to prop up home prices, it would be right to address the market failure that produces excessive foreclosures. The Senate is working on a smart reform that would begin to do this: It would give service companies that collect mortgage payments on behalf of creditors a legal safe harbor, allowing them to forgive part of a loan without having to fear that a few opportunistic creditors will sue them for being soft. Lenders as a whole would benefit, because the measure would reduce wasteful foreclosures. The flow of capital to future home buyers would not be compromised.
The Senate and the House are both considering an additional measure to reduce foreclosures. It would offer mortgage lenders a carrot: If they agree to forgive part of a loan rather than kicking a family onto the street, the Federal Housing Administration will protect them from further losses if the home's value continues to slide. Homeowners would get a break, which is unfortunate. But they would still have to pay off a loan worth 90 percent of the home's diminished value. And they would forfeit part of any gain from a future recovery in house prices.
There are risks in this policy. Lenders will try to offload the very riskiest mortgages onto taxpayers, even though safeguards in the reforms are designed to prevent that. But the good news is that neither the House nor the Senate makes the mistake of overreaching. They seek to reduce, not eliminate, foreclosure, recognizing on the one hand that an unguided market will produce too many evictions, and on the other that for really seriously indebted families, foreclosure is the right outcome. Douglas Elmendorf, a leading expert on these issues, judges that the House and Senate measures have got the balance right.
Both chambers of Congress offer ways to contain the damage from foreclosures when they do need to happen. The House version is more generous: It would give local authorities in the hardest-hit regions $15 billion worth of loans and grants to buy foreclosed properties and get people into them, either by fixing them up for resale or offering them as rentals. Grants to local government are sometimes wastefully misallocated. But both the House and the Senate have a formula that would direct the money to the neediest households in the most struggling regions.
It is too early to declare victory. The Senate has passed an egregious package of tax cuts, and lobbyists will fight to attach them to any eventual housing bill. The better ideas have yet to make it to a floor vote, though a key House committee is due to act on two of them this week. The prospects for success would increase if the administration showed clearer leadership. So far it has sounded negative but not forceful on the awful tax giveaways; it has sent mixed signals on the other measures, apparently reluctant to expand government help for the housing market, even in a balanced way.
Still, political candidates who routinely denounce Washington may soon have to face up to some good news. Shock! Congress is performing well.