Low-Income Renters to Pay for Housing Bailout

Thursday, May 22, 2008
Dean Baker
Beyond Chron

Unfortunately, that is not a joke. This appears to be the latest gem to come from our leaders in Congress.

Just to remind everyone of where things stand, Congress was wrestling
with the situation of several million low- and moderate-income
families, who are facing foreclosures on their homes. The main problem
here is that they were pushed to buy over-priced homes in
bubble-inflated markets. Making matters worse, many of these homeowners
were also the victims of sub-prime mortgage scams. They got loans that
started with relatively low teaser rates. These rates then reset,
typically after two years, to much higher rates that made the mortgages
unaffordable.

This is bad news not only for the homeowners facing
the loss of their homes, but also for the banks that will take large
losses foreclosing on homes that now sell for much less than the money
owed on the mortgage. Congress’ answer to this problem is a complex
bailout scheme in which it would have the Federal Housing Authority
guarantee new lower interest rate mortgages.

The new mortgages would pay off the first mortgages at 85 percent of
the appraised value of the house. While the banks will still lose money
under this plan, they will almost certainly end up much better off than
if the situation was just left to the market. In fact, since the banks
decide which loans get into the program, it is virtually guaranteed
that they will come out ahead.

Homeowners can benefit also, in that many will be able to stay in their
homes with more affordable mortgages. However, in many of the
bubble-inflated markets such as San Diego, Los Angeles and Boston, the
new mortgages are still likely to cost far more than renting comparable
units, draining money away from other necessary expenses, such as
health care and child care.

Furthermore, since prices are still falling rapidly in these areas, it
is unlikely these homeowners will ever accumulate equity. For
homeowners in these bubble-inflated areas, the banks will be the main
beneficiaries of this bailout.

It would be possible to prevent this problem by restricting the
guarantee prices to some multiple of rents. Rents never got out of line
with fundamentals even at the peak of the bubble. For example, if the
guarantee price was set at a multiple of 15 times the appraised rent on
a property, it would offer greater assurance the homeowner was not
paying too much on their mortgage and might also accumulate some equity
in their home.

Congress has shown little interest in ensuring the new guarantee prices
reflect fundamentals, making it likely many of the people “helped”
under the program will end up facing foreclosure a second time.
However, to make matters worse, they came up with the idea of financing
the plan by taking away a stream of funding that had been dedicated to
help low-income renters.

That’s right; Congress wants to take away money from low-income renters
to help bankers that made bad loans in the housing bubble. As we all
know, when the banks are in trouble, it is not the time to talk about
the free market.

The real painful part of this story is it would be very easy to help
the real victims in this story: the low- and moderate-income
homeowners, who were suckered into buying homes at bubble-inflated
prices with bad mortgages. Congress could just temporarily change the
rules on foreclosure to allow moderate-income homeowners facing
foreclosure the option to stay in their home paying the fair market rent.

This would provide these families with housing security. At least as
important, it is likely to result in many of these families remaining
in their houses as homeowners, since banks will have a strong incentive
to negotiate new terms on mortgages in order to avoid becoming
landlords. And the best part of this story is that families would
benefit from this change the moment Congress passed the law. There is
no need for a new bureaucracy or any taxpayer dollars.

That is what Congress would do if it was serious about helping families
facing foreclosure. Unfortunately, the banks seem to rank higher in its
concerns — remember, just three years ago, it made the bankruptcy laws
more stringent (applied retroactively), to boost bank profits.

Apparently, the banks rank so high Congress is even prepared to take
money away from low-income renters to meet their needs. Stealing candy
from babies would be a step up for this crew.

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