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Saturday, March 8, 2008
How should government respond on home foreclosures?
Andrea Cornell Sarvady, a left-leaning columnist, writes the commentary this week and Shaunti Feldhahn, a right-leaning columnist, responds.
Rebuttal
Where borrowers were truly defrauded, the government should prosecute corrupt brokers or lenders and put them in jail.
The problem is that lender fraud accounts for only a fraction of home foreclosures, and most of the broader proposals out there are compassionate but foolish. Foreclosure estimates range between 600,000 to one million this year, and most are due to standard economic shifts- or because someone gambled and lost.
If homeowners lost jobs because companies moved from the Rust Belt to the Sun Belt, that’s a fluid economy in action. Should the government really punish areas that are gaining by bailing out those that are losing steam? Or suppose one borrower prudently saved for five years for a downpayment on a reasonably-sized house, while his neighbor took a no-doc, no-downpayment, high-interest loan for a bigger house than he really needed: is it right to bail out Guy #2 now that he’s underwater? One reason our free market works is that consequences help make more-informed decisions next time.
I used to work for the Senate Banking Committee, so I contacted several conservative staff members off-the-record. They pointed out that only two-thirds of homeowners even have mortgages, and that 95% of them are paying on time! As one aide said, “What about all those people out there who made the right decision and who will profit from downturn? And why should congress try to prop-up an already inflated housing market, anyway? We need to accept the good and bad from the market.”
The government should encourage what lenders are already doing: voluntary actions like writing down underwater loans. But mandatory measures would mean the government suspending a contract between two private parties: the lender and the borrower. And as the Cato Institute’s Alan Reynolds told me, “Without secure contracts there is no security of property rights. Most of the proposed solutions are far worse than the problem, because they would restrict mortgage lending for many years while the highly-localized problem of too many overpriced houses will be largely fixed within a year or so.”
The loss of a home is a personal crisis. But we can’t afford to create a worse problem by involuntary government actions that would turn these personal crises into a national economic one.
Commentary
By Andrea Cornell Sarvady
“There’s plenty of blame to go around” is how my friend Jack, a loan officer at a local bank, neatly sums up the foreclosure crisis. From oblivious lenders to deceptive mortgage brokers, from overly optimistic borrowers to overly ambitious investors, many bear responsibility for our current subprime-related quagmire.
No homeowner deserves a free pass, even if caught up in the one-two punch of a bad loan and sinking house prices. Yet the capitalist maxim, buyer beware, feels especially callous when directed at hard-working folks who were manipulated into bad loans when they qualified for decent ones. Moreover, no matter how we got here, a neighborhood filled with vacancies and rotating tenants is bad for everyone.
Voluntary initiatives like Fed Chair Ben Bernanke’s recent appeal to lenders can be helpful, but more aggressive government intervention is needed to stem the tide of foreclosures. A reasonable solution backed by Senate Democrats would temporarily change the bankruptcy code, allowing qualifying families to file for Chapter 13 bankruptcy, then work with judges to modify their mortgages. Under current laws, vacation homes, ranches and farms can be restructured but not primary residences
Is this a total bailout for naive borrowers? Hardly. “They’re not going to get a free ride” explains Dan Immergluck, a Georgia Tech professor and expert on mortgage lending. Indeed, homeowners would have to prove that they’re residents, not speculative investors, who were deceived as to the terms of their loan, and that they can work out a payment plan.
Under these stringent rules only 200,000 families would qualify, yet there still remains nearly insurmountable opposition. The Mortgage Bankers Association complains that these negotiations would drive up interest rates. Not so-a study by Georgetown Law Center disputes the MBA’s claims, asserting that there would be little to no change in rates if legislation allows modifications in bankruptcy proceedings.
Many agree on changing the lending laws so that fewer people can be taken advantage of in the future. Yet for those who scrimped and saved for a down payment on a dream and honestly represented themselves in the borrowing process, buying a house should never have turned into such a nightmare. It benefits us all to keep those families in their homes.