The Deadman Night Rider

A forum for evening students of the SMU Dedman School of Law and other outlaws..

Sunday, October 05, 2008

Put me down for some of what this dude is smoking

Everyday provides new evidence for my theory that people are fundamentally unable to think rationally about residential real estate. Check out this column from the Wall Street freakin' Journal's opinion page from a Harvard economics professor who has an idea on how to stem the mortgage/foreclosure crisis:

We need a firewall to break the downward spiral of house prices. Here's how it might work. The federal government would offer any homeowner with a mortgage an opportunity to replace 20% of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. This would be available to new buyers as well as those with mortgages. The interest on that loan would reflect the government's cost of funds and could be as low as 2%. The loan would not be secured by the house but would be a loan with full recourse, allowing the government to take other property or income in the unlikely event that the individual does not pay. It would by law be senior to other unsecured debt and not eligible for relief in bankruptcy.

With all due respect, Professor Feldstein is cuckoo for cocoa puffs on this one. He claims that this plan is needed to provide an equity cushion to homeowners who are on the brink of slipping into negative equity from falling home prices, which would keep them from defaulting and putting more homes on the market, thus depressing prices even further. The big bugaboo, he fears, is "a downward overshooting of house prices and the resulting mortgage defaults."

Wow. So now, to shore up the holy of holies--home prices--Mr. Marginal Homeowner is supposed to sign on to a non-dischargeable federal loan that jumps ahead in priority over every one of his existing creditors and essentially pledges all of his other assets to guarantee it (car, boat, bank accounts, etc.), just to save $3000 a year--less than $300 a month--in interest payments? Honestly, you need to get out more, Professor. Are there really that many homeowners out there that are at the risk of default over $300 a month? Do homeowners have to have those homes so bad that they'll be willing to get equity by mortgaging everything else they have, or will have in the future for that matter? Maybe so.

But what happens in the "unlikely event" of default? If you think a mass of home foreclosures by private entities is ugly, just wait until the feds have to start garnishing bank accounts and seizing cars to satisfy these mortgage-replacement loans. Have we lost our minds here? Are houses so important that we're ready to fork over to the government the power to collect mortgage payments like the IRS collects unpaid taxes?? Or, in the article's somewhat antiseptic terms, by giving the government "a fully offsetting claim on individuals?" To borrow a line from Friends: remember, they're just houses, they're not love.

The big disconnect here is in how we define the problem. Professor Feldstein (and obviously alot of other folks) say the problem is falling home prices. Stop the fall, solve the problem. But that's wrong--prices are falling because homes are overvalued. We built too many and sold them to people who shouldn't have them. Stopping falling prices just expends resources to keep them overvalued, and can only delay the inevitable. Let's find the floor now and be done with it.


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