Government-sponsored housing inflation is locking the next generation out of homeownership.
No major newspaper seriously questions the truism that foreclosures destroy neighborhoods. No news network doubts that “troubled borrowers” are overwhelmingly good Americans who have been set back by a job loss or medical emergency. And what kind of anti-American Shylock would claim that you shouldn’t give bad borrowers government-backed loan modifications, cutting their mortgage payments by 20 percent?
The interesting new wrinkle on those old, false arguments is that real estate interventionists no longer pretend they have any real goal other than keeping house prices inflated. Even a year ago, the arguments for rescuing real estate prices were phrased in broad, spillover-style metaphors—“meltdown,” “implosion”—that suggested a concern for the common bystander. Today, the argument is a lot plainer: We need to keep existing homeowners (or home borrowers) from experiencing any further decline in closing prices. When I ask Rep. Brad Sherman (D-Calif.) to explain his support for extending exorbitant Federal Housing Administration loan guarantees even while the real estate market continues to cool, he replies, “The economy of Los Angeles would tank if prices fell another 50 percent.” Here’s how Rep. Barney Frank (D-Mass.), in an October interview with The New York Times, justified his support for the agency’s shoddy lending standards: “I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast.” Economy.com front man Mark Zandi puts it even more bluntly. The housing market, he says, “is showing improvement only because it is on government life support.”
Life support is expensive. When that troubled borrower gets a 20 percent haircut, his bank has to take a loss, and the bank is compensated for the loss by you, through the $50 billion Home Affordable Modification Program. The Treasury Department has paid more than $100 billion to allow the failed government-sponsored enterprises Fannie Mae and Freddie Mac to keep on guaranteeing questionable loans. Fannie and Freddie, in turn, have been expanding rather than reducing their loan portfolios—the opposite of what you’re supposed to do when you’ve got an unmanageable debt load. Read More Reason
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