EDITORIAL
Obama hits home on foreclosures
February 19 2009
Like Icarus, many American homeowners are now paying the price of their disdain for gravity. So are investors in mortgage-backed securities, who bet that US house prices would not fall. But as the housing bubble deflates, it also drags innocent victims into a wave of foreclosures. The Obama administration’s plan to help homeowners, after its underwhelming stimulus and bank rescue packages, is a welcome move to provide relief.
Collapsing US house prices are the epicentre of the global crisis. They have destroyed banks’ balance sheets, causing first a credit crisis and then a worldwide collapse in demand. As people lose their jobs and incomes, even those who made prudent decisions a few years ago are finding it difficult to hold on to their homes. Record low mortgage rates, supported by the Federal Reserve’s extraordinarily lax monetary policy, should help keep people in their homes by reducing their debt burdens. But with US housing prices down more than 25 per cent from their peak, many find themselves saddled with mortgages worth more than their houses.
The anti-foreclosure plan boosts Fannie Mae and Freddie Mac’s capital by $200bn and allows them to refinance loans of up to 105 per cent of the house value, above the usual 80 per cent, so more owners can benefit from low mortgage rates. It also offers $75bn worth of incentives to modify loan terms that claim too much of borrowers’ incomes – and allows bankruptcy courts to restructure mortgages should incentives prove not big enough to work.
This is all good, economically and politically. Foreclosures come in self-reinforcing spirals – repossessed homes sold on the cheap push down the value of other houses – which government should try to brake. Some worry that this rewards reckless behaviour. But the plan is well targeted: the administration aims to contain the fallout, not to keep everyone in their home. The plan helps only those with a reasonable chance to retain their house.
Laisser-faire critics protest that prices should fall until markets clear. They are wrong. In a systemic crisis markets are inherently unstable: further price falls are as likely to accelerate their own decline as to stabilise, in the process shrinking demand throughout the economy.
Most crucially, fighting foreclosures is a political imperative. The administration needs a lot more money to save the US banking system – money that will be forthcoming only from voters who feel they, and not just Wall Street, are being rescued. This plan may help win them over. At $275bn, that seems like a bargain.
