The Housing Bailout is Hitting a Wall

The L.A. Times on Thursday carried this story about the government’s stalled efforts to intervene in the housing crisis. 

Nine months into the worst housing crisis in a generation, Congress this week took up the most aggressive government plan so far to break spiraling home foreclosures and tumbling house prices that threaten to pull the economy down. But even as a key House committee began to mark up the bill Wednesday, there were signs that the measure could be caught up in a crippling political crossfire. Mortgage industry intransigence, voter anger over possible government aid for speculators and economists’ fear that thousands of homeowners might just walk away from troubled loans are contributing to a potential stalemate.

So people’s outrage over possible federal help for reckles borrowers has reached Congress’ ears. That’s good news.  Why should the government — or anyone, for that matter — agree to guarantee mortgages for people who have already proven themselves fiscally unwise?

The heart of the House plan is a proposal to require both lenders and mortgage holders to accept significant losses — about 15 cents on the dollar — in exchange for federal guarantees that the reduced loans would be repaid.

The same logic goes for lenders.  Why should lenders receive any assistance from the government? I’d rather see Congress penalize lenders for their lax lending standards than rescue them. As it turns out, lenders have shown no interest in participating in a solution.

Any action by the government is not likely to go over well.

“There is no sympathy for anything that smacks of bailout,” said Allen Sinai, chief economist of Decision Economics Inc., who recently testified in favor of the Frank bill. “The outrage has shown up very quickly, and means that at this point the government can only go so far.”

The story also notes that by next year, 1 in 5 American homeowners — 12 million people — will be “underwater” on their homes, meaning they owe more than their property is worth.  Some lawmakers say the government reduce the amount owed on mortgages so people will be less likely to abandon their homes.

Why now? For much of the 1990s, plenty of California homeowners were underwater, too, and there was no talk of a bailout.  Plenty of people walked, but some opted to wait it out.  We got through that without government help.

Congress should let things work themselves out and focus its efforts on people who truly need it.

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