Thursday, March 06, 2008

Government decides where you live 

A bill sponsored in the Minnesota Senate by Ellen Anderson (companion in the House sponsored by Jim Davnie) would give an option out for owners of homes financed by subprime or negative amortization mortgages. They get to stay in their houses for a year. The bill appears to impose a moratorium on foreclosures for a year. Homeowners would have to make the monthly payment they were required to make when the mortgage was originated.

Seems everyone has an idea what to do about the mortgage crisis. Federal Reserve Bank of Boston president Eric Rosengren touted a shared appreciation model where banks take a haircut on the principal of the loan but in return get a stake in any price appreciation from that point forward. I'm not so sure that giving banks a piece of a declining asset is such a good deal when what banks need to do is deleverage, but it doesn't appear anyone in a policy position is prepared to say interfering in mortgage contracts is bad policy.

So leave it instead to Steve Landsburg, who points out that those homes in the hands of people who cannot afford them without a subsidy (and will it really be paid ONLY by the banks?) keeps these houses out of the hands of someone who might benefit from it:
I predict with great confidence that when I say that foreclosures create new homeowners, a sizable chunk of my readers will scoff that "the people who can afford them would have been able to afford nice homes anyway." I could use economics to explain why those readers are mistaken (a glut of homes on the market leads to falling prices, etc.), but that's unnecessarily complicated. All it takes is the simple observation that there cannot be more homeowners than there are homes, and if one home becomes vacant, then there can be one new homeowner. Call it the law of conservation of homes.

That's one reason to temper your distress over strangers suffering foreclosure. Here's another: If you get to live in a nice home for a few years and then lose it to foreclosure, you are not worse off than someone who never got to live in a nice home in the first place. If the Treasury Department is looking for ways to help people, it would be nice to focus on the people who are most in need of help.

Losing your house is painful. Never having anything to lose is even more painful. How do the feds justify spending money�and, rest assured, any program to stop foreclosures will cost money�to help struggling homeowners instead of, say, the struggling homeless? Or, for that matter, a child starving in Africa? There is room for a lot of legitimate debate about how much we should be taxed to help the less fortunate. But whatever level of assistance we agree on, I'd like to see it targeted to those who genuinely are less fortunate.

There's at least one more reason to regret Secretary Paulson's eagerness to forestall foreclosures: If banks can't enforce contracts (or even if they "voluntarily" forgo the enforcement of contracts under pressure from the Treasury Department), they will undoubtedly be more reluctant to make loans in the future. Rest assured that somewhere out there�invisible to you and me but nonetheless real�is a young couple who, thanks to this intervention, won't be able to get the mortgage they want next year.

I predict with equal confidence that a sizable chunk of readers will attribute my observations to a failure of compassion. But which is more compassionate: to care about the fortunes of the people who happen to be in your field of vision or also to include those whom you cannot see? The homeless are out there. The starving children in Africa are out there. The would-be new homeowners are out there. Each of them, in different ways, stands to gain or to lose from the policy choices we make.
Here's one example of a homeowner-to-be MOBster who is getting her family's house from a bank. The bank got the property via foreclosure.
We don�t want to take advantage of people and rip them off, but we also want the market to dictate our housing price. We�ve been watching prices� we had an area in mind, what people around here call �south of the river.� Our hope was in an area that is still developing, we would find some better prices. It seems to be the case...
They are a couple who will have their first baby in less than four months (she is a former student of mine.) The Anderson-Davnie bill chooses to help current homeowners at the expense of Liz and Josh. I'm not saying one is more valuable than the other, but the question is, who do you want to decide who gets the house? I'm certain they could have afforded a house at the higher prices of three years ago, but it would be a smaller house, in some other, less desirable area. This bill would influence the decision of where the Lizes and Joshes of the world live too.

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