MikeBolen.com

San Francisco – As the political season rages candidates find it an absolute to be seen “doing the right thing”. The present housing crisis is a case in point, as Congress now seems increasingly intent on aiding millions of homeowners who can’t easily pay their mortgages and may face foreclosure. This sort of bailout might seem like “doing the right thing” but it is incredibly harmful and politicians should be ashamed.

I certainly take no pleasure in seeing someone fall into foreclosure. According to the University of North Carolina, estimates of defaults in 2008 run up to 2 million. If realized, that would be roughly twice the 2006 level and about 2.7 percent of the nation’s 75 million owner-occupied homes. It would be the highest rate since World War II but well below much higher rates during the Great Depression.

Many proposals to fix housing abound from a temporary stay on all foreclosure to “induced” sit downs between lenders and borrowers. No matter the plan or better yet no matter the scheme the proposals place politicians on a retaining wall, trying to protect troubled homeowners. The imagery is conducive to reelection and that is about it.  Politicians promoting these schemes moraly soil themselves and bring about economic chaos.  

About 50 million homeowners have mortgages. Who wouldn’t like the government to cut their monthly payments by 20 percent or 30 percent? But these shemes reserve that privilege for an estimated 1 million to 2 million homeowners who are the weakest and most careless borrowers. With the FHA now authorized to lend up to $729,750 in high-cost areas, some beneficiaries could be fairly wealthy. By contrast, people who made larger down payments or kept their monthly payments at manageable levels would be made relatively worse off. Government punishes prudence and rewards irresponsibility. Inevitably, there would be resentment and pressures to extend relief to other ”careless & needy” homeowners.

The justification is to prevent an uncontrolled collapse of home prices that would inflict more losses on lenders — aggravating the “credit crunch” — and postpone a revival in home buying and building. This gets the economics woefully backwards. From 2000 to 2006, home prices rose by 50 percent or more by various measures. Housing affordability deteriorated, with home buying sustained only by a parallel deterioration of lending standards. With credit standards now tightened, home prices will absolutely fall to bring buyers back into the market and to reassure lenders that they’re not lending on inflated properties.

If rescuing distressed homeowners delays this process, the aid and comfort that government gives some individuals will be offset by the adverse effects on would-be homebuyers and overall housing construction. None of this means that lenders and borrowers shouldn’t voluntarily agree to loan modifications that serve the interests of both. Foreclosure is a bad place for most creditors or debtors. Although the process is messy, promising to lubricate it with massive federal assistance will retard it as both wait to see if they can get a better deal from Washington, which would then assume the risk for future losses.

My grandmother a direct desendent of our second president John Adams through the Ashby line often quoted John Adams I think this quote sums up what his thoughts would be on the foreclosure mess.

“All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation.”  JOHN ADAMS