Editorial -- A Housing Bailout's Paltry Results, and Their Lessons
PASSED BY Congress in July and put into effect on Oct. 1, the federal government's Hope for Homeowners program was billed as strong medicine for the twin ills of rampant foreclosures and sagging home prices. Advocates argued that it would help stave off recession by delivering mortgage relief to the most deserving of distressed homeowners -- all while creating the least possible taxpayer expense and avoiding perverse incentives. Basically, the plan was to offer as much as $300 billion in government-guaranteed home loans to people whose current mortgages exceed the value of their houses; 400,000 people would benefit, it was said. Well, the early returns are in, and the program is, at this point, a flop. There have been only 312 applications, according to the Department of Housing and Urban Development. At that rate, the three-year program would help only about 5,400 borrowers.
We hate to say we told you so, but -- we told you so. Except that we never guessed that the program would perform quite this poorly. The Bush administration and the program's congressional author, House Financial Services Committee Chairman Barney Frank (D-Mass.), are now engaged in a blame game, with Bush officials saying that the program is a victim of burdensome conditions imposed by Congress and Frank asserting that he only agreed to those conditions as the price of a politically acceptable bill. Each side has a point. Mortgage relief causes genuine ambivalence among Americans of good faith. They feel sorry for their neighbors and want protection against an uncontrolled housing collapse, but they don't think it's fair to spend taxpayers' money bailing out people who took on unaffordable loans and the bankers who enabled them. Hope for Homeowners tried to keep everyone happy by requiring lenders to sacrifice some of the principal value of homes while requiring borrowers to give up future profits and assume monthly payments of at least 31 percent of their incomes. This may have been the best available deal, politically, but it doesn't make sense, economically, for very many people. Therefore, hardly anyone has chosen it.
After the reports of Hope for Homeowners's dismal start came another good news-bad news story about housing. Hope Now, a government-backed alliance of mortgage lenders, said it is on track to keep 2.2 million homeowners out of foreclosure in 2008 -- but banking regulators said that about half of the loans modified in the first three months of the year fell back into delinquency within six months. Consumer groups attribute the problem to the modifications' insufficiently generous terms, particularly lenders' refusal to reduce principal amounts or interest rates. There is some truth to this. But declining interest rates have lessened the problem of "exploding" adjustable-rate mortgages. Increasingly, loan delinquencies and foreclosures result from unemployment; people who lose their jobs find it hard to make house payments on time. This suggests that even if loan modifications double in 2009, as Hope Now predicts, they may not keep pace with foreclosures.
There is much discussion now of adding an even bigger anti-foreclosure measure to an economic stimulus plan in the first days of the Obama administration . But recent experience teaches that it is hard to design an anti-foreclosure plan that is both targeted and effective -- and that the recession is now driving housing's woes, not the other way around.