Economy.com's Mark Zandi is quoted in yesterday's Wall Street Journal predicting that the number of home foreclosures in the U.S. will hit a record 1.3 million in 2007. Who is to blame? Most media accounts, and a smattering of grandstanding politicians, have slammed the "predatory" practices of mortgage lenders who were so eager to generate business that they gave loans to anyone with a pulse. But in recent weeks, there's been a push back against lender-scapegoating.
In a March 29 column in the New York Times, University of Chicago economist Austin Goolsbee cited data supporting the thesis that new kinds of mortgage loans had greatly expanded home-ownership among sectors of the population that had previously been kept out of the market. The data only covered the period 1970-2000, so its relevance to the mania that took place in the last few years of the housing bubble could be questioned. But Goolsbee was championed throughout the blogosphere as yet more evidence that critics of subprime lenders were actually "credit snobs" who don't believe that poor people should be allowed access to new financial innovations..
In the current New Yorker, James Surowiecki repeats parts of Goolsbee's thesis -- we're better off expanding home ownership, even if some loans go bad, then not expanding it at all -- and also suggests that home-buyers who borrowed above their means should get their share of the blame for the current mess. Shed no tears for the speculator who gets burned trying to make a quick profit by flipping a house without putting any money down, he says. And be wary of Congressional efforts to sharply tighten lending standards, lest that keep worthy would-be home-owners out of the market.
In the midst of all this, there have been commentators like Mark Thoma at Economist's View, who avoid the all-or-nothing formulations so popular with pundits while pondering the appropriate mix of policy actions that would restrict fraud and the worst lender excesses without keeping worthy buyers out of the market. But from a rhetorical point of view, the shift in emphasis on how the housing bust is being covered has been fascinating to watch. To accuse those who are suspicious of subprime greed of being anti-poor is a remarkable feat of class warfare jujitsu, an act in which one's own aggression is turned neatly back against itself.
But what's happened in the course of the defense of subprime and option-ARM and no-money-down loan innovations, is that we are being distracted from the deeper story. And that's not necessarily who is to blame for the popping of the bubble, but what the pop means for the greater economy.
The Journal reports today that housing inventory "surged" in March -- "The number of homes listed for sale in 18 major U.S. metropolitan areas at the end of March increased 6.5 percent from a month earlier..." Combine that news with Zandi's prediction on foreclosures, and home prices seem guaranteed to drop significantly as the year progresses. Meanwhile, there are increasing reports of growing delinquency rates in mortgages that are considered one notch more respectable than subprime loans -- the so-called Alt A loans. Job losses in the construction industry are also accelerating. Recession predictors have plenty of data to choose from.
Tightening loan standards now, when Wall Street has already lost its appetite for subprime and Alt-A loans, is a classic closing-the-condominium-door-after-the-borrowers-have-all-gone-bankrupt strategy. The real question is whether at the height of the madness, in 2005 and 2006, when my phone was ringing off the hook with obviously dodgy telemarketing calls begging me to refinance my mortgage, some sage words from government officials or policy action could have prevented the market from getting out of whack. We'll never know the answer to that, because the de facto decision was to let the market take care of itself.
And maybe that's where it will end. Maybe the subprime lenders who got too greedy will all go bankrupt, the investment banks that gave them the credit to play with it will take medium-sized financial hits, and the borrowers who shouldn't have been borrowing will instead be renting newly available cheap apartments. That's the rosy scenario.
The less pleasant prospect is a recession that could have been avoided if Congress and the White House had recognized a destabilizing bubble in the making, and had taken some mild corrective action to calm the waters.