Bail-Tale

As I read through the various Congressional proposals to help struggling homeowners, I am of two minds: the cynic can almost see politicians drooling as they seize an opportunity to buy more votes in an election year (perhaps that stimulus check wont do the job), while the optimist hopes that lawmakers really do want to help.

I have expected officials to come up with a plan to assist homeowners who are under water on their mortgages. The issue gained more momentum after taxpayers helped to finance the J.P. Morgan-Bear Stearns deal. After all, if we were going to help an ailing firm, perhaps creating a way to support the masses is not so far-fetched. Still, unless the housing recession were to turn far uglier, it is unlikely that the government would actually buy mortgages. Instead, the Democratic plan would make available up to $300 billion in federally insured loans to help troubled owners (who meet stringent criteria) refinance adjustable-rate mortgages into more affordable 30-year, fixed-rate loans. The plan would not bail out everyone---speculators and those who are in trouble on vacation homes or investment properties would be out of the running for the re-fi chance. The taxpayer tab for this plan would be approximately $10 billion.

I have heard from plenty of homeowners who were patient enough to accumulate their 20% down payments and not bite off more than they can chew complain about any bailout plans. “Why should I have to pay for someone else’s financial mistakes?”; “How is this different than having the government bail out the dopes who bet big on the dot-com stocks?” and “Only with the pain of loss will people change their future behavior!” These are all valid points but it seems there is of course another side to the story. As Representative Barney Frank, (D-MA), the chairman of the House Financial Services Committee and the principal author of the leading Democratic plan said recently, “These are people who are guilty of having borrowed too much money for a home for themselves and their families. They didn’t shoot anybody. They didn’t rob anybody…they are guilty of not having anticipated that housing prices would drop.” (The cynic would pipe in at this point and add that many of these people are actually guilty of greed!)

But there are costs to society for letting homeowners fail--having millions of people enslaved to their homes is a negative for the entire economy. The reason is that if people are spending a lot to maintain their mortgages, then they have very little surplus to spend elsewhere, thus exacerbating the economic slowdown. For that reason, and perhaps mounting pressure, even the Bush Administration has capitulated on the issue.

While previously resisting the calls for bail out and promoting a hands-off approach to regulation, yesterday a representative of the Administration laid the groundwork for an alternative to the Democratic plan. Brian Montgomery, the commissioner of the Federal Housing Administration (FHA), said that his agency would start providing government insurance for some US homeowners who are under water on their mortgages and for some who are were late on three consecutive monthly mortgage payments—about 100,000 homeowners total.

The taxpayer cost of these proposals is not yet known. It is expected that this is among the first steps to expanded government assistance. It may not be a full-fledged rescue plan, but it sure is sounding a lot more like politicians of all stripes see the need to pounce on the housing issue. I expect to hear more as the “bail-tale” gathers steam.