About 50 million homeowners have mortgages. Who wouldn’t like the government to cut their monthly payments by 20 or 30 percent? But Frank’s plan reserves 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 “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 backward. From 2000 to 2006, home prices rose 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 should fall to bring buyers back into the market and to reassure lenders that they’re not lending on inflated properties.
I bought my house in 2001. I made a 20% down-payment on a house that was about 2.5 times my annual income, and at the time had enough savings to cover a good number of months of living expenses, including mortgage, should I lose my job. Last year, I took a home equity loan for a home-improvement project that was 15-20% of my home value, or 1/4 to 1/3 of my equity. I’m in a savings position now that if I had to, I could pay off my outstanding mortgage debt, the only debt I’m carrying by heavily dipping into my retirement account and other savings.
Meanwhile, others went into debt for the full purchase price of their property, plus closing costs, in houses that cost many times their annual income with little or no savings. And those people are about to get rewarded by the government for the profiigacy? And as Samuelson notes, my home value will suffer as a result? So, I get punished for doing the right thing, while those who took patently stupid steps will get rewarded?
Only in politics could this be considered a rational solution. The best bet: let housing prices fall (which would also help solve the affordable housing crisis we hear so much about). I’ll lose some net worth either way, but overall it will be better for me, the economy as a whole and not create the moral hazard of showing the government will reward stupid decisions.