April 14, 2008
By J.D. Foster, Ph.D.
Bailouts, subsidies and slush funds: Such are the main
ingredients of the housing bill now stewing in Congress.
Bailouts to irresponsible borrowers, many of whom lied on their
mortgage applications and/or 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
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
The really bad news is that Congress is also trying to stick the
Federal Housing Administration's (FHA) nose into private markets in
a major way. This could disrupt 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 has 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 nonprofit organizations - is actively
seeking out 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 reworked more than a million
mortgages, and is reworking hundreds of thousands more every
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
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 or having
committed a prosecutable fraud in providing false
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 BMW, declined to buy a home with no down payment,
ignored the low teaser rates dangled by shyster brokers. Meanwhile,
the homeowners who yielded to temptation are offered an escape
hatch. Who pays? In short, you pay - unless you're getting a
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 lied or just made bad decisions,
where does it stop? How about a bailout for the pensioners and
shareholders who have 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
J.D. Foster is the
Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at
The Heritage Foundation (heritage.org).
First appeared on washingtontimes.com
Bailouts, subsidies and slush funds: Such are the main ingredients of the housing bill now stewing in Congress. Bailouts to irresponsible borrowers, many of whom lied on their mortgage applications and/or 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.
J.D. Foster, Ph.D.
Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
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