Saving the Real Estate Market by Paying the Neighbor's Mortgage

The quickest way to help the auto industry would be to make sure that no one in the U.S. defaults on a car loan. Certainly the government could make sure that people who are employed and do not have a history of being deadbeats get a portion of their car loans paid. When cars are repossessed and go onto the market to be sold as "used," that drives down the entire market for similar vehicles. A surfeit of well-maintained cars available at prices well below new ones undermines the ability of Detroit to get its sales back up without having to offer incentives.

Like all government-assistance programs, a car-owner-assistance program would eventually cost taxpayers money. An agency, probably part of the Treasury, could give banks the money to help qualified car buyers keep their vehicles. A man sitting in his house looking out the window could see a car he is helping to pay for sitting in the next-door neighbor's driveway. A really clever car-loan bailout program would allow the taxpayer to use his neighbor's car as compensation for his higher taxes. (Read "Four Steps to Ending the Foreclosure Crisis.")

Word has leaked out, or has been leaked, that the Administration will propose a very large program to help homeowners who have good intentions and strong moral character make their mortgage payments if they reach the precipice of default. Reuters reports that "under the evolving plan, homes would undergo a standardized reappraisal and homeowners would face a uniform eligibility test."

It is not hard to imagine that taxpayers will end up helping to pay for the mortgages of people who live in their counties, towns or neighborhoods. One homeowner might have part of his taxes paying a part of the mortgage for the house across the street.

This program has powerful underlying economic logic, even though it might initially seem to be the creation of lunatics. When a home goes into foreclosure, it lowers the value of all the nearby homes. The sharp drop in home prices over the past two years has, as a root cause, the abandonment of properties, which adds to housing supply in a disorderly manner. After a foreclosure, a house is not sold based on economic logic but on the desire of banks to stay out of the business of owning residences. The National Association of Realtors said the average value of a home in the U.S. dropped 12% and that foreclosures were a root cause.

If there is a tax worth paying, many people would probably say that one that helps build a foundation under the value of their own homes is high on the list. The process may create an atmosphere that looks and feels like socialism, but if the net effect is that the drop in housing prices is reversed in short order, even free-market advocates may tolerate this plan rather than watch the world burn.

If the mortgage program does work, the road to perdition will have been paved all the way to its end. But people may not mind taking this road, if the destination is one where housing prices will not be down an additional 15% or 20% over the next year.

— Douglas A. McIntyre

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