April 14, 2008

April 14, 2008 | Commentary on Economy

Homing In on a Solution

During a recent visit to the doctor, I noticed a sign on his wall: "First, do no harm." That is, of course, part of the Hippocratic Oath. If only we could convince lawmakers to adopt that adage.

Instead, Congress does two things well: "nothing," and "too much." And the recent struggles in the housing market are tempting many lawmakers to over-react. Before they wade in and make matters worse, they should make sure they will first "do no harm" to our national economy.

That's critical, because owning a home has always been a big part of the American dream. Between 1960 and 1995, about 64 percent of Americans owned their own homes.

In the last 10 years, though, that number shot up, reaching an all-time high of 69 percent in 2004. But the increase was made possible mainly because lenders made it easier for people with poor credit to buy homes. They offered "subprime" mortgages, such as those with no down payment, or those in which the borrower paid only interest on the loan -- for a while.

To raise more capital to lend to homebuyers, lenders bundled these risky mortgages together and sold them to investors. As long as housing prices were increasing, it was an easy and popular way to encourage housing sales. By 2006, almost half the new mortgages in the U.S. were subprime.

Now, though, the bubble has burst. Prices are falling, foreclosures are climbing and lawmakers (many of whom will face voters this fall) want to do something.

Consider the bill the Senate recently passed. It would give anyone who buys a home which has been foreclosed upon a $7,000 tax credit. But that's the wrong approach. It would only encourage lenders to foreclose, when it would be better for them to work with owners to keep them in those homes.

And it should be noted that many of those now losing their homes committed fraud to get into them in the first place. As an economist from George Mason University puts it, "In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers." Even The New York Times has noted that, "as much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications."

Instead of trying to intervene directly in the housing market, lawmakers should focus on making sure those markets are working properly and see that they're not repeating the mistakes that caused today's problems.

An example of a successful intervention is the "Hope Now" program, a voluntary alliance of businesses brought together by the Departments of Treasury and Housing and Urban Development.

Hope Now has encouraged the mortgage industry to restructure loans so families can keep their homes. In the last nine months, the industry has reworked more than a million mortgages to prevent foreclosure. That's helped owners and neighborhoods retain value.

Meanwhile, the Federal Reserve has pitched in, making money available so markets won't freeze up as prices fall. That should keep the housing market operating until it can right itself -- which it always does.

No amount of regulation or intervention can force people to pay more for a home than it's worth. And people who can't afford to make their monthly payments will, sooner or later, lose their houses, no matter what Washington says or does.

Instead of trying to prop up the artificially high prices and homeownership rates of the last few years, lawmakers should let the market work. That will speed the healing process, allowing us to cure the problems in our housing and financial markets -- and get our economy growing again.



Ed Feulner is president of The Heritage Foundation (heritage.org)..

During a recent visit to the doctor, I noticed a sign on his wall: "First, do no harm." That is, of course, part of the Hippocratic Oath. If only we could convince lawmakers to adopt that adage.

Instead, Congress does two things well: "nothing," and "too much. " And the recent struggles in the housing market are tempting many lawmakers to over-react. Before they wade in and make matters worse, they should make sure they will first "do no harm" to our national economy.

That's critical, because owning a home has always been a big part of the American dream. Between 1960 and 1995, about 64 percent of Americans owned their own homes.

In the last 10 years, though, that number shot up, reaching an all-time high of 69 percent in 2004. But the increase was made possible mainly because lenders made it easier for people with poor credit to buy homes. They offered "subprime" mortgages, such as those with no down payment, or those in which the borrower paid only interest on the loan -- for a while.

To raise more capital to lend to homebuyers, lenders bundled these risky mortgages together and sold them to investors. As long as housing prices were increasing, it was an easy and popular way to encourage housing sales. By 2006, almost half the new mortgages in the U.S. were subprime.

Now, though, the bubble has burst. Prices are falling, foreclosures are climbing and lawmakers (many of whom will face voters this fall) want to do something.

Consider the bill the Senate recently passed. It would give anyone who buys a home which has been foreclosed upon a $7,000 tax credit. But that's the wrong approach. It would only encourage lenders to foreclose, when it would be better for them to work with owners to keep them in those homes.

And it should be noted that many of those now losing their homes committed fraud to get into them in the first place. As an economist from George Mason University puts it, "In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers."Even The New York Times has noted that, "as much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications."

Instead of trying to intervene directly in the housing market, lawmakers should focus on making sure those markets are working properly and see that they're not repeating the mistakes that caused today's problems.

An example of a successful intervention is the "Hope Now" program, a voluntary alliance of businesses brought together by the Departments of Treasury and Housing and Urban Development.

Hope Now has encouraged the mortgage industry to restructure loans so families can keep their homes. In the last nine months, the industry has reworked more than a million mortgages to prevent foreclosure. That's helped owners and neighborhoods retain value.

Meanwhile, the Federal Reserve has pitched in, making money available so markets won't freeze up as prices fall. That should keep the housing market operating until it can right itself -- which it always does.

No amount of regulation or intervention can force people to pay more for a home than it's worth. And people who can't afford to make their monthly payments will, sooner or later, lose their houses, no matter what Washington says or does.

Instead of trying to prop up the artificially high prices and homeownership rates of the last few years, lawmakers should let the market work. That will speed the healing process, allowing us to cure the problems in our housing and financial markets -- and get our economy growing again.

Ed Feulner is president of The Heritage Foundation.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office