Legislating a house you can afford

New details on a possible homeowner rescue plan raise a now-familiar question: Is helping the reckless fair to the prudent?


Andrew Leonard
February 13, 2009 8:35PM (UTC)

Krishna Guha, the Financial Times' superb Washington-based reporter, has some more details on the new homeowner rescue plan that may or may not have energized the stock market on Thursday afternoon. The summary provided by Reuters yesterday told us little beyond the news that the plan would attempt to help homeowners before they spiraled into the foreclosure process. Guha says the new plan aims to support homeowners, banks, and mortgage servicers in an effort to stabilize the housing market.

People involved in the process said the Treasury was likely to base its policy on a scheme championed by Sheila Bair, head of the Federal Deposit Insurance Corporation. This plan reduces monthly outgoings to a maximum of 38 per cent of income, which may become the standard for the government scheme.

Under the original FDIC plan, pioneered at IndyMac, a bank that was taken over by regulators before it was sold to investors, loan modifications would only be offered to borrowers whose loans were in arrears. Policymakers were concerned about this rule giving an incentive to fall behind on payments in order to qualify for relief....

Ms Bair had proposed incentivizing banks to cut monthly payments by agreeing to share the loss if the loan subsequently went back into default.

But officials at the Treasury and the Federal Reserve argued for upfront subsidies, on the grounds that the cost to the government would be easier to quantify.

Experts say the foreclosure relief program is also likely to involve cash payments for servicers to increase their capacity and incentive to modify loans used to back securities sold to investors.

The money to pay for the new program would come from the as-yet-unallocated remainder of TARP.

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How The World Works will pay close attention to how this initiative unfolds, because the task of stabilizing the housing market without setting off another unsustainable housing bubble makes for a darn good test of the acumen of the economist brain trust assembled by President Obama. Unlike the stimulus bill, which was at the mercy of Congressional power brokers all intent on pursuing their own priorities, a new housing scheme will be all theirs -- they'll own it, so to speak. So let's see what they can do.

But I'm also intrigued by a theme that popped in the comments thread on yesterday's post, and much, much more strongly among an angry mob discussing the news at Calculated Risk, that it is somehow unfair to the rest of us to bail out homeowners who are in houses that they can't afford. I really think we are far beyond the point where worrying about what is fair or unfair is relevant to the challenges we face. Like it or not, our collective well being depends on, as Obama put it in his press conference earlier this week, "arresting" the downward spiral that threatens the livelihoods of the prudent as well as the imprudent. There might be some schadenfreude to be mined from the sight of former McMansion-owners lined up outside a soup kitchen, but I'm guessing it won't feel so satisfying when the line extends all the way to your or my block.


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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