Enterprise, not laws, will solve foreclosure mess


Enterprise, not laws, will solve foreclosure mess

May 1, 2008 4 min read

Commentary By

Ronald D. Utt, Ph.D.

Visiting Fellow in Welfare Policy

Alan Pisarski

Policy Analyst

The collapse of the subprime mortgage market in late 2006 set in motion a chain reaction of economic and financial adversity that has spread to global financial markets, created depressionlike conditions in the housing market and pushed the U.S. economy to the brink of recession.

In response, many in Congress and the executive branch have proposed new federal spending and credit programs that would greatly expand the role of government in the economy but do little to alleviate the distress caused by the financial crisis that has spread rapidly to nearly all sectors of the economy. …

With the overall economy seemingly blameless for the current housing market problems, all evidence suggests that something went terribly wrong in the mortgage market and that it needs to be repaired to prevent a repeat in the future. ... The history of federal mortgage finance regulation is largely one of costly failure. There is no rational reason to expect better results from more regulation in the future. …

[But] former executives of a major mortgage lender have recently announced plans to raise $2 billion to buy distressed mortgages at a discount, restructure them and resell them as performing mortgages at a profit.  Other financial firms are looking to enter the same market.

For example, the Private National Mortgage Acceptance Company, or PennyMac, was created for just this purpose. Congress, the U.S. Treasury and the Federal Reserve should look for ways to encourage the private sector to create many more such entities, including a review of relevant tax laws and regulations that may hinder their creation. …

Ronald Utt is the Morgan Senior Research Fellow at The Heritage Foundation.

Washington lawmakers wasted no time turning the collapse of the I-35W bridge in Minnesota into an opportunity to flog pet policy prescriptions. Former House Transportation Committee Chairman Don Young, R-Alaska, wants to raise the gas tax. Sen. Hillary Clinton, D-N.Y., wants money for Amtrak. Sens. Chuck Hagel, R-Neb., and Christopher Dodd, D-Conn., want an infrastructure bank imitating Fannie Mae on steroids, President Bush and Sen. John McCain, R-Ariz., want earmark money redeployed, and some urge more tolls and private investment.

While these proposals differ significantly in technique, all endorse the presumption that the collapse occurred because of funding deficiencies and that the nation is in the midst of an infrastructure crisis. The available facts suggest otherwise.

While there may be general merit to a few of the budgetary proposals floated by some, it isn't apparent that any are of particular relevance to the I-35W tragedy - in large part because we don't yet know how or why the bridge failed, or why annual inspections by trained professionals didn't catch the problem.

We can expect more detail on the inspection process and government response to it in the months ahead, but evidence to date suggests that detailed inspections over the past several years - which identified the bridge as "structurally deficient" - did not see the problem as serious enough to require weight restrictions or other emergency efforts.

One report contends that repairs estimated to cost $1.5 million were recently thought to be sufficient to remedy identified deficiencies. Moreover, the fact that the I-35W bridge was undergoing a costly deck renovation when it collapsed also undermines the claim that funding was a problem.

Indeed, the U.S. Department of Transportation in its "2006 Conditions and Performance Report" reveals significant progress over the past decade in reducing the number of structurally deficient bridges. In 1994 18.7 percent of the nation's bridges were identified as structurally deficient, but that number had fallen to 13.1 percent by 2004, a 30 percent reduction. It's important to note as well that the designation "structurally deficient" implies several gradations of distress, each of which necessitates different remedies ranging from closure, repair or more frequent and intense inspections. It doesn't necessarily imply that there's an immediate safety problem.

Still, the I-35W collapse suggests that federal and state transportation officials must do better, and the investigation under way will certainly lead to improvements in the inspection/remedy process, which seems to have failed to accurately identify near-term risks. But a better system of risk assessment is only a part of a solution that will also depend upon the ability of DOT's to marshal needed resources expeditiously.

A shortage of money for transportation projects isn't the key problem. Rather, the greatest obstacle will be how to allocate the existing pile of money among competing "transportation" goals, many of which have nothing to do with transportation or safety.

State transportation departments once were largely driven by the clear objective to complete the interstate highway system, begun in 1956 and mostly completed by the early 1980s. But upon completion, DOTs lost their guiding star. A host of other goals materialized, such as economic development, employment, regional equity, transportation choice, sidewalks, trolley cars, earmarks, hiking trails, national parks and forests, Appalachian poverty, universities, environment, Mag-Lev railroads and truck parking lots.

These and dozens of other duties have little to do with mobility, infrastructure quality or safety, but they divert scarce resources from pressing needs. As a consequence, DOTs are hard pressed to address legitimate transportation priorities amid the pressure to accommodate influential constituencies.

What's needed are performance-based transportation programs to help state DOTs distinguish between the important and the trivial. Citizens need to hold DOT managers and elected officials accountable for their success or failure to meet a detailed set of quantitative performance goals related to congestion relief, fatalities, safety and quality of existing infrastructure.

In model legislation published by The Heritage Foundation in January 2007, we noted that such "a plan will include actions to bring the condition of the state's inadequate bridges ... up to acceptable levels. Those levels will be strictly monitored and rated against predefined quantitative performance standards of quality."

We face a serious challenge in the years ahead as many of the Interstate bridges built before 1970 reach critical ages. The rest of the Interstate needs reconstruction as well. Some would recommend greater spending to accommodate both pressing needs and the other goals that have accumulated over the years. But implementing quantitative performance standards obviates this conflict by empowering DOTs to prioritize and fulfill projects in accordance with these standards - and hold them accountable if they fail. Can we afford anything less?

Alan Pisarski is an independent consultant in Virginia. Ronald Utt is the Morgan Senior Research Fellow at The Heritage Foundation.

First appeared in the  Examiner