The refinancing of mortgages of an estimated 400,000 homeowners in danger of default. I dont see that going far with California homeonwers who have an average home value twice the average of some mid western states. www.infoshare.com
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The Homeownership Obsession
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It's also true, as economist Mark Zandi shows in his new book, "Financial Shock," that today's housing collapse had multiple causes: overconfidence about rising home prices and demand; cheap credit, in part supplied by overseas investors; lax lending practices; inept government regulation; speculative fever, and sheer fraud. Still, the government's pro-housing policies contributed in two crucial ways.
First, they raised demand for now suspect "subprime" mortgages. The Department of Housing and Urban Development sets "affordable" housing goals for Fannie Mae and Freddie Mac to dedicate a given amount of credit to poorer homeowners. One way Fannie and Freddie fulfilled these goals was to buy sub-prime mortgage securities—many of which have now gone bad. Second, government's housing bias created a permissive climate for lax lending. Both the Clinton and present Bush administrations bragged about boosting homeownership. Regulators who resisted the agenda risked being "roundly criticized," notes Zandi. In 2005, mortgage delinquencies were low. Regulators couldn't easily make "the case to lenders that their lending standards were out of whack."
Good intentions have led to bad outcomes: an old story. Fannie's and Freddie's losses impelled the Treasury Department to propose a rescue for the companies; given their size and the government's implicit backing for their debt, doing otherwise would have risked a financial panic. Personal savings have been skewed toward housing. Many Americans approaching retirement "have accumulated little wealth outside their homes," concludes a study by economists Annamaria Lusardi of Dartmouth College and Olivia S. Mitchell of the University of Pennsylvania. Even some past gains from the prohousing policies are eroding; the homeownership rate has dropped to 68 percent.
We might curtail housing subsidies without subjecting the economy to the disruption of outright elimination. The mortgage interest deduction could be converted to a less generous credit; Fannie's and Freddie's expanded powers could be made temporary; FHA's minimum down payment could be set at a more sensible 5 percent. But taking even these modest steps would require a recognition that the obsession with homeownership has gone too far. It would require a willingness to confront the huge constituency of homeowners, builders, Realtors and mortgage bankers. There is no sign of either. When the next housing crisis occurs, we will probably find its seeds in the "solution" to the last.
© 2008
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