The Case for Housing Help

Both the Republican president and Democratic members of Congress pressured the government mortgage lenders Fannie Mae and Freddie Mac to provide the funding for riskier mortgages, and then Federal Reserve Chairman Alan Greenspan resisted the use of the Fed's authority to regulate lender behavior aggressively on the grounds that the economy and the financial markets did best when they operated as freely and as unregulated as possible. So if the public in this election asks who is at fault, the answer is that the failure stretches across party lines and includes regulators.

Now that the housing bubble and the financial bubble have both burst, how do we get back to stability?

The government is finally seeking to assist borrowers who owe their banks more than their homes are worth. The government program aims to have the Federal Housing Administration encourage lenders to forgive a portion of those loans. If they take the loss and issue new, smaller mortgages, they'll get the federal government's financial backing. The most hard-pressed borrowers will be able to repay loans that are too large relative to their incomes or the diminished value of their homes.

So far, so good. But the government has to enforce tight standards. And it should not bail out any of the following:

Flippers: speculators who never occupied their homes or people who bought second homes they couldn't afford for purposes of resale.

Liars: who took out what are now called "liars' loans," which exaggerated their income or their net worth or pledged that they were going to become owner occupants when in fact they were just speculators.

Certain lenders: those who made imprudent loans in order to generate fees and bundled the loans and sold them off as securitized obligations to other financial institutions.

The legislation should be restricted to help only those who can and will stay in their homes with a modest amount of aid.

Remedies. The proposal of the House Financial Services Committee is that the new loan would be worth no more than 85 percent of current appraised value and must adhere to other federal loan limits, such as a top amount of around $730,000. Further, homeowners would be required to share any profits if they sold or refinanced within five years. Some estimate that this plan could save as many as 2 million homeowners from foreclosure.

This legislation is not without its problems. The first is finding the actual owners of the mortgages so that they can be brought to renegotiation—no simple matter, given how many mortgages were bundled together. Other questions arise. What standards should govern how the property is appraised? Should the value be the likely proceeds from the patient sale of a house? Is it the price in today's chaotic market, or is it what the price would be in a calmer market? How do you appraise the value of the house if there are no buyers because prices are still declining? Bloated appraisals were part of the problem in the past because appraisers, paid by either the borrowers or the lenders, too often exaggerated the home values to maximize the amount of financing. Such risks to worry about were captured by the headline of a newspaper ad for a jeweler: "Guaranteed to appraise for more."

The Senate version is as close to a boondoggle as you can get. The worst provision is retroactive tax breaks for home builders and banks, which is nothing more than a typical response to the powerful lobbyists of these two groups. Please explain why these institutions deserve benefits at taxpayer expense, given their overwhelming business misjudgments of the past half-decade—never mind the huge profits they made. It would also provide billions of dollars in block grants to let cities and states buy properties from grateful banks at still-inflated prices. Which homes are to be bought in which markets and at what prices is barely considered. The best part of the Senate program is the $7,000 tax credit for buyers of foreclosed properties, which should help limit the number of houses sitting vacant and deteriorating.