Heritage Foundation Leadership for America

Federal plan could unravel effective private efforts

Bailouts to borrowers, many of whom bought homes at ridiculous prices hoping to flip them before the party ended. Tax credit subsidies to supplement the down payments of buyers looking for a steal on a foreclosed home. And a little slush fund for state and local governments to reward their favorite local builder or bank by taking empty properties off their hands at above-market prices.

And that's the good news. Why good? Because Congress would only temporarily reward bad behavior and waste a few more billions. Policies like these, while infuriating, at least have no major long-term consequences. The really bad news is Congress is also trying to stick the Federal Housing Administration's nose into private markets in a major way.

This could disrupt the processes already at work to resolve the housing crisis and, worse, expose taxpayers to hundreds of billions in losses. What's going on here?

Borrowers by the millions are falling behind on their mortgages. The problems are most severe in a few states. Some, such as Nevada, California and Florida, enjoyed a huge, multiyear speculative bubble that's now popped in spectacular fashion. Others, such as Ohio and Michigan, are seeing home prices decline because of more fundamental weaknesses in their economies, in some cases significantly exacerbated by extraordinarily foolish state fiscal policies. Yet just about every state is experiencing a housing problem: unusual numbers of borrowers who are delinquent or soon will be, home prices falling a little or a lot and contraction in construction.

Fortunately, the mortgage industry isn't waiting for Congress to get its act together. Spurred on by the Treasury Department through a program called Hope Now, the industry — supported by services, counselors and community non-profit organizations — is actively seeking creditworthy borrowers who are or are likely to get into financial trouble. Why? To find a way to rework the mortgage or the payment schedule so the borrower can stay in the home.

Since last summer, the industry has successfully reworked more than a million mortgages, and is reworking hundreds of thousands more every month.

Is the process perfect? Of course not, but just wait until the feds get into the act directly. "I'm from the government, and I'm here to help" is never a good greeting when somebody rings the doorbell.

Congress wants to inject the FHA into this process. The FHA would guarantee these reworked mortgages, meaning that if they get into trouble again, the FHA (read: taxpayers) will be on the hook for any losses. In fairness, the FHA is better equipped today to assume these new risks and responsibilities. Only a few years ago, the agency was on the precipice of extinction, having seen its market share dwindle to almost nothing.

Recognizing its fate, the FHA went on a crash modernization program — just in time, if Congress carries out its threat. But neither FHA improvements nor market troubles justify Congress putting taxpayers on the hook for future losses from past bad behaviors. Congress has no business trying to bail out stressed homeowners who bought high-priced properties or took on mortgages they couldn't afford — often without documentation.

And who pays for this bailout? Not "the government." It's all the responsible homeowners and renters who resisted the temptations of the housing boom, refused taking out a home equity loan to fund a vacation or new car, declined to buy a home with no down payment, ignored the low teaser rates dangled by unscrupulous brokers. Meanwhile, the homeowners who yielded to temptation are offered an escape hatch. Who pays? In short, you pay — unless you're getting a bailout.

And if we're going to bail out lenders who went for the fast buck, builders who rode the good-times train up the hill and are now in a downward slide, and borrowers who made bad decisions, where does it stop? How about a bailout for the pensioners and shareholders who've lost money in the stock market in the last two or three years?

A proposal for a refundable tax credit for capital losses is just around the corner. Where does the bailout business stop? Simple. It stops at the beginning — by saying no to bailouts, subsidies and slush funds.

J.D. Foster is the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at The Heritage Foundation (heritage.org).