sub-prime mortgages IV: policy possibilities going forward...

From Nick Timiraos of the Wall Street Journal…

Lawmakers face a difficult balancing act between protecting vulnerable homeowners and ensuring that individuals bear responsibility for taking mortgages that they couldn't afford. Some borrowers have defaulted on mortgages even before those loans reset to higher rates, while other foreclosures have hit speculators who bought properties primarily as investments.

To stem foreclosures, the White House has turned to the Federal Housing Administration, which doesn't originate loans but guarantees the loans of higher-risk borrowers against default. President Bush loosened some rules last month that could help 80,000 borrowers refinance mortgages next year. The House and a Senate committee approved legislation this past week that would further ease FHA underwriting standards.

Democrats want to allow Fannie Mae and Freddie Mac, the two government-sponsored mortgage brokers, to purchase mortgages above their current $417,000 loan limit. Demand for securities backed by larger, or jumbo, mortgages has dried up on Wall Street and that credit crunch risks placing further strain on the housing market in large U.S. cities. Federal regulators set those limits last year after the lenders disclosed accounting misstatements of $11.3 billion. The White House has opposed increasing loan limits until accounting overhauls are in place.

Uhh...Why is the federal government in the business of purchasing individual mortgages?!


From the WSJ’s op-ed page (September 22-23), it looks like politicians may try to ignore the disincentives and inequities of a bail-out...

This week the House of Representatives overwhelmingly approved a plan to erase billions of dollars of subprime loan defaults in the private mortgage industry. How? By making taxpayers responsible for future losses.

The Bush Administration recently announced support for a similar plan, and the housing industry is in full lobbying mode. One of the lone skeptics is Alabama Senator Richard Shelby, who warns that this could be one of the most expensive federal bailouts since the savings and loan crisis of the late 1980s. He's on to something….

No one wants to see borrowers lose their homes, and the good news is that private lenders are already working with late-payment borrowers to refinance the terms of these subprime loans. What's troubling about the FHA expansion plan is that the insurance guarantee places taxpayers atop the housing bubble….If housing prices keep falling, home owners would have a financial incentive to walk away from the loan and leave it to taxpayers to pay off the balance.


And finally, some soft-hearted and soft-headed counsel to pursue “tenderness” in this arena—from Tom Teepen (published as an op-ed in the C-J):

From the way President Bush's comments on the mortgage meltdown were pitched in advance, you would have thought his compassion had finally caught up with his conservatism…

Choose your own response to Tom's opening blast:
a.) HAHAHA! Stop it, Tom...your making me laugh milk through my nose!
b.) What a tender and compassionate thing for Tom to say.
c.) Mortgage meltdown? Is the entire housing sector falling apart?
d.) How compassionate is it to make money from people who are being responsible with their mortgages to subsidize those who are not?

[But] Bush did not...come to the rescue of the literally millions who may be within months of seeing their homes snatched away by jacked-up payments. Instead, the administration would make maybe 80,000 additional people eligible for FHA-backed loans and will ask Congress for legislation to make it easier for some shaky homeowners to renegotiate with their mortgage holders…Notice, please, how tardily, tentatively and minimally officialdom has come to the plight of workaday folks who are headed for dispossession.

In his much-awaited utterance on this mess, Bush scolded, "It is not the government's job to bail out speculators or those who made the decision to buy a home they could never afford."
Bill Clinton could feel your pain at 100 yards. Bush, too. The difference being this president thinks you had it coming…Sometimes a little humanity can be good business.

I hate to end these foour postings on such a lame note. But we must avoid the "analysis" of those like Teepen-- and wrestle with the policy earnestly as the WSJ does above.