Taxpayers’ Money

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When it comes to the housing crisis, many folks – especially in Congress - have become very careful about not wasting taxpayers’ money.

In an article by John D. McKinnon and Damian Paletta, under the headline “Bush to Expand Help on Mortgages,” today’s Wall Street Journal (http://online.wsj.com/article/SB120769266029299359.html?mod=todays_us_page_one) reported that President Bush will issue a directive to the Federal Housing Administration that will, “…expand a government program that helps struggling borrowers keep their homes…”

The article went on to say:

“The proposal stands as the White House's version of a concept Democrats also have been weighing -- using the government's power to induce lenders to reduce payments for struggling homeowners. The administration's approach is narrower in terms of the number of homeowners who could qualify, which will provide some political cover from Republicans leery about being seen to bail out lenders or borrowers who made bad bets by taking out risky loans……

"’We must also work to help the innocent victims of the housing crisis, without providing a taxpayer-funded bailout to speculators, scam artists, or recklessly irresponsible borrowers,’ said House Minority Leader John Boehner (R., Ohio).”

Problem is: No one’s been talking about “a taxpayer-funded bailout to speculators, scam artists, or recklessly irresponsible borrowers.” All proposals seek to help homeowners in their one-and-only home.

Besides, won’t the economic-stimulus package, which will shortly provide a rebate to most taxpayers, ultimately be paid for with taxpayers’ money? Sure, taxpayers are getting a tax cut now. But that adds to the federal deficit, and the increased debt must ultimately be retired with taxpayers’ funds. Why not accord the same allowance for homeowner relief? If we can give away money to everyone who merely earned income, why can’t we be equally generous with homeowners who are about to lose their homes? Moreover, there’s a collective benefit to the entire economy – which helps all of us - when we pursue these types of relief.

The point is: The longer we wait, the worse the situation becomes. As foreclosures rise, the supply of homes on the market grows. This further depresses prices, which leads to a downward price-spiral as more homeowners face foreclosure and abandon homes whose mortgages now exceed their homes’ market value.

The latest – March 18 – minutes from the Federal Reserve’s Open Market Committee (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20080318.pdf) made the point forcefully:

“Participants noted that the contraction in the housing sector had deepened and that considerable uncertainty surrounded the outlook for housing. Although some stabilization in housing markets was likely needed to help underpin an economic recovery in coming quarters, there was little indication that that process had yet begun. Elevated rates of foreclosures and large inventories of unsold property were likely to depress home prices for some time. Lower home prices would eventually buoy home buying, but in the meantime the prospect of continued price declines could lead potential homebuyers to defer purchases for a time, further damping housing activity and adding to downward pressure on home values. Participants noted that the trajectory of house prices was a major source of uncertainty in their economic outlook.”

Damn the torpedoes! Full speed ahead!! The glut of homes on the market lies at the root of today’s problem. A homeowner bailout (aka rescue package) will minimize the number of distressed properties that are dumped on the market. That will be taxpayers’ money that is well spent.

© 2008 Michael B. Lehmann