Good for the Goose
April 04, 2010
Friday's New York Times carried an article about its readers' reactions to the recently announced changes to the Making Home Affordable mortgage modification program. These include the following:
· Requiring participating servicers under HAMP to offer at least 3 months’ forebearance of mortgage debt for unemployed borrowers, and encouraging such assistance for up to 6 months.
· Requiring participating servicers to use principal reduction as a primary means of reducing borrowers’ payments where loans are more than 115 percent of the current home value.
· Offering borrowers that are current on their mortgages but with debts greater than their home’s current value the opportunity to refinance into a lower cost, long-term fixed rate mortgage insured through the FHA if the current lender will agree to reduce principal owed by at least 10 percent and the total combined debt including any second liens would be no greater than 115 percent after the refinancing.
· Requiring HAMP servicers to work with borrowers in bankruptcy on mortgage modifications, and waive the trial period for such modifications if consumers have been successfully performing under bankruptcy settlements.
· Increasing the incentives to get second lien holders to reduce their claims to facilitate modifications.
· Clarifying that HAMP servicers must suspend all foreclosure actions and notices for borrowers that have sought modifications or are in trial modification periods, and requiring a written certification that a borrower is not HAMP eligible before an attorney or trustee can conduct a foreclosure sale.
The gist of the Times article was that these further accommodations for distressed borrowers are unfair, especially to those borrowers that are making their payments and will not have a chance to lower their mortgage prinicpal. As the author of the article noted,
All of the comments, however, went right to the heart of the criticism of all of the government’s bailout programs. After all, the aid for homeowners comes in the wake of bailouts for the banks and the American International Group, and then the auto industry. In every case, taxpayer money was on the line. So you can understand all of the anger about paying to fix problems not of their own making.
While there is a smattering of comments supporting the changes and expressing sympathy for their potential beneficiaries, most of the comments range from the mildly annoyed to the downright vituperative.
Interestingly, none that I saw made the slightest connection to the generous extension of tax credits for homebuyers to prop up the housing market and keep builders and other real estate professionals to these measures. I'm guessing most of the commenters didn't get one of these, either. And if they did, I suspect they took it gladly, although there's really little or no difference between the two transactions.
As economist Simon Johnson and his collaborator James Kwok pointed out in an October, 2009 Washington Post opinion piece,
The main argument for the tax credit is that it stimulates the economy and stabilizes the housing market. Seen purely as a stimulus, the tax credit is highly inefficient. The National Association of Realtors claims that the credit created 350,000 new sales; the Calculated Risk blog calculates that this means the government is paying $43,000 for every extra house sold (since most sales would have happened anyway).According to the Wall Street Journal, Goldman Sachs estimates 200,000 new sales, implying a cost of $80,000 per marginal sale.
Even at a price of $43,000, what are we getting? Given that these are first-time home buyers, and given the glut of homes on the market, most of these are financial transactions where a house changes hands in exchange for cash (and additional transaction costs). The $43,000 is not being invested; it isn't buying anything for the public, like a new road. It's just cash going into people's pockets.
The fact is that the government subsidizes homeownership and plenty of other consumption through tax breaks and other means. Pushing lenders to reduce principal on loans that are hopelessly underwater to help keep current owners in place is a much cheaper alternative than the abandonment and neglect that has been the legacy of so many home foreclosures.
What's that they say about the goose and the gander?