What About Homeowners?

THE BE YOUR OWN ECONOMIST ® BLOG

The Lehmann Letter ©

Every day we learn the government bailout has been extended to more businesses or there’s an effort under way to broaden the bailout’s coverage.

The banks are gobbling up their share of the $700 billion package. AIG’s assistance has topped $100 billion. The automakers will probably receive a rescue package. American Express has obtained permission to become a bank in order to ease the strains facing its credit-card business.

Meanwhile, home prices continue to plunge as foreclosures grow. Millions will lose their homes and millions more will end up under water (mortgage debt exceeds home’s value). What’s fair about that? Why should homeowners suffer while financial institutions and manufacturers are thrown a life line?

Everyone knows what needs to be done. There should be an immediate 90-day moratorium on foreclosures. During that period mortgages should be written down to the property’s market value for those homeowners who can’t make their payments. This entails a means test, so one should be created. If the homeowner still can’t pay the mortgage, then the term of the loan should be extended and the interest rate reduced. The federal government can compensate the lender for any loss.

That would direct relief to those who need it most.

Would there be complaints by those not facing foreclosure because the means test demonstrated their ability to pay? Would they be jealous of those who received assistance when they did not? Perhaps. But it would still be worth it to stop the losses and halt the foreclosures.

Would prices stop falling? Probably not. But they would not fall as far as they will fall if we don’t stop the foreclosures.

Washington should stop thinking small!

© 2008 Michael B. Lehmann