FORECLOSURES – AT 7:32 P.M. ET:  Some economists are predicting a new foreclosure crisis this year, and the Obamans are reacting with a proposal.  From the Washington Post:

The Obama administration plans to overhaul how it's tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed, senior officials said Thursday.

Banks and other lenders would have to reduce the payments to no more than 31 percent of a borrower's income, which would typically be their unemployment insurance, for up to six months. In some cases, administration officials said, a lender could allow a borrower to make no payments at all.

The new push, which the White House is scheduled to announce Friday, takes direct aim at the major cause of the current wave of foreclosures: the spike in unemployment. While the initial mortgage crisis that erupted three years ago resulted from millions of risky home loans that went bad, more recent defaults reflect the country's economic downturn and the inability of jobless borrowers to keep paying.

The administration's newest push also seek to more aggressively help borrowers who owe more on their mortgages than their properties are worth, by encouraging lenders to cut the loan balances of millions of these distressed homeowners and possibly refinance into loans backed by the Federal Housing Administration. The problem of so-called "underwater" borrowers has bedeviled earlier administration efforts to address the mortgage crisis as home prices plunged.

COMMENT:  Let's try to sort this out.  Once again, as in the health-care farce, the administration mixes together good ideas with bad ones, with an overall drift toward more federal control of the economy.

It's reasonable that banks come up with creative measures to save the homes of people who are legitimately unemployed.  There could certainly be forgiveness for a number of months, or just paying interest for those months, or reductions for a period of time.  I'd much prefer that those things be negotiated privately, and they often are.  If the federal government enters the picture, with its heavy hand, you can have a foreclosure problem leading to a bank liquidity problem, if the income of small banks is suddenly cut.  Compassion and understanding, of course.  But these things must be linked to practices that avoid another banking crisis.

On the second point, helping borrowers who owe more on their homes than their homes are worth...excuse me, but where is it written, as they say, that the government should guarantee profits in real estate?  For too many years, Americans were told that you can't lose money on real estate.  Now the government wants to guarantee that proposition. 

Homeowners, like anyone else – investors, business owners, professionals setting up a practice – must understand that there are risks involved.  The irresponsible, adolescent mentality that governed real estate for too long cannot be permitted to become national policy.  If you help one sector to maintain profitability, what about other sectors?  Do we nationalize real estate, the way we nationalized part of the auto industry?  And, by the way, if homeowners in some distress get bailed out by Peter, what is to prevent Paul, in the form of utility companies, phone companies, and local taxing authorities, from raising their rates, knowing that their customers are in a better position to pay them?

What we have here is a circular firing squad.  We see it in "federal aid to education" all the time.  The federal government gives out education grants, and the colleges respond by raising their prices, which they call tuition.  Hey, kids are getting federal money, aren't they?

Look at these proposals with two eyes.  Yes to compassion and aid to those truly in need, no to financial gimmicks that can easily backfire.

March 25, 2010