Learning to Love the Housing Bailout. It's unfair, but the economy doesn't care.
Tennessee senator bob corker is not in a forgiving mood when it comes to people whose home loans are underwater, particularly if they borrowed beyond their means--or cheated to do so. That's some 11.1 million loans and over $700 billion worth of negative equity. He's torqued that the recent $26 billion housing-industry settlement with the big banks allows them to lower their loan principals--and possibly harm investors who own the mortgage bonds tied to those loans. He nearly came unglued when a Federal Reserve official suggested that the government's mortgage guarantor, Fannie Mae, could also fund a bailout for distressed homeowners.
Nothing doing, says Corker: "Reducing the principal on home loans for borrowers who put no money down amounts to a massive wealth transfer from places like Tennessee, where most homeowners have borrowed responsibly, to places like California and New York, where exotic mortgages were widely used to finance a speculative housing boom."
Senator, please don't lump New York in with those liar-loan lovers in California. TIME's home state isn't nearly as delinquent as the Left Coast. But yes, to someone who's never missed a mortgage payment, asking the government to bail out these losers seems like a reward for the greedy and the stupid. Why, Corker says, "ask people in Tennessee who played by the rules to bail out reckless borrowers in other parts of the country"?
Here's why: because bailing out the greedy and the stupid is part of what a healthy economy does. And let's not forget that lots of people simply got caught in an economic tornado, its monetary damage similar to the real thing. They never intended to default on a mortgage.
We're always in the bailout business. The problem for Corker, many others and me is the free-rider issue. In every economy, there are always people looking to skate. You know some of them. They work off the books. They sell counterfeit goods. They apply for benefits to which they aren't fully entitled. They don't have auto insurance. The number of free riders varies from state to state, nation to nation. In Greece, free riding is akin to breathing. In Germany or Japan, it's an outrage.
Most of us play the game by the rules, don't borrow too much and wait an hour after eating before jumping into the ocean. But there are always some people living larger than they ought to, and we hire lifeguards to haul their sinking butts out of the surf when they do something that endangers them. There's a cost to that--think about what states pay to provide health care to the uninsured--but we tolerate it when it isn't prohibitive, and it holds our social fabric together.
That's why reducing the principal on some of these underwater mortgages isn't as bad as it sounds. Despite some good news in Miami (thanks, Brazilians!), the real estate market continues to sputter. According to CoreLogic, the peak-to-current change in housing prices from April 2006 to January 2012 was -34%, including distressed sales. In Tennessee, overall housing prices are still declining or flat. Distressed homeowners can't sell or move, so sales stagnate and housing goes nowhere. "You could actually see a turnaround in the housing market relatively quickly," said New York Fed president William Dudley in a speech outlining a number of Fed proposals to lift housing.