Feds Debate Giveaways to Homeowners
Faced with a possible tidal wave of home foreclosures beginning this fall, Democrats and Republicans are battling over a philosophical question with huge practical implications: should the government ride to the rescue?
Both the Bush administration and Democratic leaders in Congress agree that legions of homeowners could be overwhelmed in the next 18 months, as low teaser rates expire on more than two million adjustable-rate mortgages, causing monthly payments increase sharply.
But the Bush administration and Congressional Democrats are ideologically divided about what Washington should do. Administration officials are reluctant to bail out people who bought homes they could not afford or simply gambled that easy credit and rising real estate prices would lead to quick profits.
Democrats, though opposed to a broad bailout, are proposing an array of measures to help lower-income people renegotiate their loans and stay in their homes.
The proposals would expand the program of insuring home loans under the Federal Housing Administration, part of the Department of Housing and Urban Development; create a national fund for "affordable housing"; expand the ability of Fannie Mae and Freddie Mac, the government-sponsored finance companies, to buy renegotiated subprime mortgages; and give bankruptcy judges more power to order easier terms for borrowers.
The Bush administration, with the Treasury Department heading the efforts, is looking for more limited solutions. Administration officials are working on their own ideas to let the F.H.A. insure slightly more expensive homes, which could make it easier for people with low incomes or weak credit to switch out of subprime mortgages and into more traditional fixed-rate loans.
I realize that bailing out overextended homeowners plays well in election years. But what's the long-term cost? If we bail out everyone that bought more than they could afford, if we bail out everyone who didn't ask hard questions before signing a $200,000 loan, if we bail out those too eager for quick riches to read the fine print, what message do we send?
A bailout is just another way of subsidizing risky, irresponsible behavior.
The government needs to let the housing market land however it lands. Everyone involved in the current crisis bears some responsibility for the crisis. Banks got a little too loose with their money. Would-be homeowners got a little too confident in an ever brighter tomorrow. Bad decisions were made all around.
A bailout would only convince people and banks that it's okay to take on huge risks -- Uncle Sam is waiting to save you and protect you from consequences. Ultimately, that's more dangerous to the economy than a turndown in the housing market.