Will Low-Income Renters Pay for the Housing Bailout?
That's the inside word from the Washington Post. To remove any possibility of misinterpretation, here is the exact quote from the paper:
"To cover the cost of the program, Sens. Christopher J. Dodd (D-Conn.) and Richard C. Shelby (R-Ala.) agreed to use a portion of the profits from mortgage financing giants Fannie Mae and Freddie Mac that had been set aside for low-income rental housing."
There you have it, redistributing money from low-income renters to banks that made bad mortgages. Where are the supporters of the free market?
Of course, there is still hope. Maybe this was just a trial balloon being floated by Dodd and Shelby. Maybe the Post got it wrong (it ihas been known to happen). But, if this is really the policy that Congress is going to pass, it is an extraordinarily cruel blow to low and moderate-income families.
--Dean Baker
I'm with you Dean, but you'd be more convincing if you had an actual plan to keep home owners from losing their homes. Maybe the government needs to force the mortgages to be rewritten in favor of the borrowers, forcing the banks to take a haircut. But everything you've proposed turns home owners into renters.
I understand that your first concern is for lower income renters but you don't seem to have any sympathy at all for buyers.
May 17, 2008 11:55 AM | Reply | Permalink
Dean, you ask where the free market is? (I want to puke every time I hear 'free market.') It's quite alive and functioning as planned.
Free market defined: Unlimited economic power for some with the necessary consequence of economic powerlessness for others. And so, those who might qualify for low-income rental housing, are, as determined by the 'free market,' the powerless among us, must submit to the rule of the powerful and watch their hope of decent housing disappear into the pockets of the powerful. As you see, the free market is quite alive and functioning as planned.
May 17, 2008 12:32 PM | Reply | Permalink
Yes, I also have a comment about "free markets":
Every market is always subject to manipulation.
The question is whether the manipulation is done in the open through policies that can be changed by un-electing the manipulators? Or whether the manipulation is done by private, unelected people who cannot be identified, much less voted out of office?
This is in my opinion the central reason explaining why government must exist, its actions must take place in public, and the real decisionmakers (voters) must be allowed to make their voices heard.
The mortgage "securitization" Ponzi bubble and the interests served by the various proposed solutions are an excellent case supporting the hypothesis that the marketplace is manipulated by unidentifiable, unelected (==unaccountable) people.
I've been trying to find a way to blunt the conservative argument that "the market must prevail", unmanipulated by unaccountable governments. It seems that the market does, and will always prevail. We need only to make sure that decisions are made with the needs of all stakeholders in mind, rather than shutting whole classes of stakeholders out of the discussion.
May 17, 2008 2:01 PM | Reply | Permalink
Destor,
My proposal gives homeowners the right to stay in their homes and will almost certainly keep more of them as homeowners than anything else on the table. (Banks do not want to become landlords -- it implies a substantial loss in value to them and rather than spite their borrowers, they will negotiate terms to keep people in their house as owners, in most cases.)
Some people will still lose their house under my plan and any plan. The real problem here is that we have ungodly stupid people who encouraged low and moderate-income families to buy homes at bubble-inflated prices. The real tragic part of this story is that these same people are still making housing policy, and they are prepared to throw low-income renters on the street in order to get a few more dollars to the bankers who made bad loans. That's really great policy.
May 17, 2008 12:47 PM | Reply | Permalink
Thanks Dean. I'm with you on the current policy. But I think that's because it's directed at banks rather than borrowers. Why can't the government just say that the impending foreclosures are bad for society at large and put a stop to them? Why do we instead have to go to your rental plan?
I like that under your plan the banks will likely say "I don't want to be a landlord" and negotiate willingly but I don't trust them to do that. They'll probably just open landlord offices to provide new jobs to ivy league finance grads. Why take the risk? The government can just tell them "No, you have to renegotiate, you have no choice," and leave it at that.
May 17, 2008 5:08 PM | Reply | Permalink
That's pretty lousy. Why not get some of these funds from Wall Street profits - and those that caused this catastrophe. Oh wait, those are friends of Senators Dodd (especially Bear Stearns) and Shelby.
Really upsetting that they would take the funds from a much needed low income housing program. And Dems agreed to this crappy legislation?
We really need Public campaign financing - so we can get rid of these guys.
May 17, 2008 5:57 PM | Reply | Permalink
Dean:
I am with you regarding any plans to force those who are economically worse off than the housing buyers to get involved in their misfortune.
That being said - those who unwisely entered a market that their economic status did not merit (due to creditworthyness considerations) must bear the burden for their decisions - and the financial institutions that peddled in such risky mortgages should be forced to eat any losses they incur.
Otherwise, what incentive do they have to NOT engage in such behavior in the future?
Isn't the situation precisely the same as for those who enable drug addicts or alcoholics?
As with most things - it is necessary for most to 'hit bottom' before there is any meaningful change in behavior.
Find a way to cushion the blow - yes - but do NOT interfere with the necessary and painful forces that work to ensure that destructive behavior is not repeated.
May 17, 2008 8:54 PM | Reply | Permalink
Hence, institutions must be regulated. Regulations are the "morals" of institutions. Any talk of "moral hazard" (on the bank side of the equation anyway) is just silliness.
May 18, 2008 5:36 AM | Reply | Permalink
Dean,
It sounds like using funding taken from low-income resources is the compromise that will get Bush to sign the program. Everybody gets a haircut but low-income renters are bald already. It’s like Robinhood’s evil twin. Listening to Paulson, I get the feeling the “market” is now solely comprised of Wall Street and the financial brokers (banks, investments, etc.). This has become the free market and driving system of our economy. Oh yes, we still have this little problem of a housing collapse and mortgage crisis, but not to worry, the markets are calm since we’re cushioning the blow for them. Everything will be all right.
What he’s saying is that the financial markets are the foundation of the economy, so they are what are important and his only job is to keep them healthy regardless of their risky behavior. Isn’t this just the S &L bailout all over again; rewarding bad behavior? At least there were some prosecutions of the out and out crooks with the S & L actions.I don’t pretend to understand economics, but in a capitalist society isn’t the entire economy from the vegetable seller at a farmer’s market to WalMart to the kid handing you your Big Mac part of the free market structure and important to the whole economy? Aren’t things like jobs and home-ownership the structure that undergirds the economy? Isn’t that the real infrastructure of this country? Am I wrong or has the economy become more and more centralized in the financial markets since Reagan? Bailing out, modifying and regulating the system to avoid this in the future means punishing those who pushed the risky loans onto people who jumped at a chance to own their own home.
The banks and financial markets incited this bubble because they were profiting from it just like the last (tech) bubble that led into recession. I think people who are persuaded into loans they can’t afford bear some responsibility but aren’t the ultimate problem. Usury laws, which are gradually being undermined, are needed protections for people who can’t possibly fully understand complicated loans and contracts. The country won’t collapse if the “markets” are allowed to reap what they have sewed. Isn’t that what a free market does?
May 17, 2008 9:58 PM | Reply | Permalink
I was going to be obnoxious and correct you, "Reap what they've sown" But on reflection, I like "sewed" better.
It's brilliant.
The bankers have their interests sewed up and ready to go.
May 18, 2008 8:35 AM | Reply | Permalink
Thanks. You are the number one spelling bee (grammar bee?). Did you see this: “…economy, so they are what are important…”
Even though it sounds awkward, I left it alone because I knew it was right (puts on desperately-seeking-approval face)! Oh, wait, now I wonder if it is...
May 18, 2008 12:55 PM | Reply | Permalink
If you're serious, and I'm fervently hoping you aren't, then I would say in this case you need to go with what sounds correct.
Since you used "is" earlier in the sentence, my guess is that "so they are what IS important" would be more correct, in order to keep it consistent.
I could be wrong. I'm merely a buzzed bee.
May 18, 2008 1:25 PM | Reply | Permalink
Doesn't it depend on what the meaning of "is" is?
May 18, 2008 1:52 PM | Reply | Permalink
It do!
Brilliant!!
:D
May 18, 2008 3:24 PM | Reply | Permalink
I think only tenants are "subject" to the discipline of the free market. Investment bankers have shown that they are so intelligent and competent that they shouldn't be subject to the same discipline. And why do we bother with the Democrats?
May 17, 2008 11:17 PM | Reply | Permalink
Why don't they take the money they are sending to Iraq for a war does not exist... just an occupation. Why do they always take money from the "poor" or "low income" first as if they can afford it?
May 18, 2008 7:20 AM | Reply | Permalink
While I admire your thoughtful effort at reasonable thinking about the housing crisis, I believe that it is too deeply enmeshed with other economic forces to be resolved fairly or, indeed, to be resolved at all.
This economy seems unstable in a way not seen before, its machinations out of control as cogs slip in new ways or lock into some crazy assemblage of economic cogs now free of any levers to impede motion.
Put another way, things are going to get a lot worse. The sooner it goes down completely, the sooner we can think about solutions.
A person who loses a house through a mortgage miscalculation, a lost job or a serious illness (with or without health insurance) --well these many results of one very bad economic problem. I haven't heard any serious talk about that problem.
May 18, 2008 10:04 AM | Reply | Permalink
ugh..
make that "--well, these are many results of one very bad problem"--
or something like that. Coffee anyone?
May 18, 2008 10:07 AM | Reply | Permalink
Perhaps a Mimosa or a Ramos Fizz would go down better on a Sunday.
May 18, 2008 10:19 AM | Reply | Permalink
Hey , bee thing...ya got that right !
What's the news over at the hive? I took a look but you all seemed mighty serious. Couldn't find a niche to quip or be my bad mean self. Does the AA ever complain about your pic? I get a beer every time I see it. Not afraid to down one by 10 AM. But a light beer.
Bee, did you know that for some diabetics, a Coors light actually lowers blood sugar?
May 18, 2008 12:09 PM | Reply | Permalink
Do tell. Of course I'm not for anything that lowers sweetness, sweetie. Coors light isn't beer. I'm not quite sure what it is.
I have been far too serious lately, but I blame that on the lack of decent snark. Desidero is the only one even attempting to post any type of sarcastic and amusing bon vivant bromides, and he's only one poster, contrary to popular urban legend.
I will immediately clear my thirsty avatar with AA. I'm not sure that they have the resources to go after drunken bees, tho. Perhaps a contribution from the honey lobby will keep them complacent.
May 18, 2008 12:47 PM | Reply | Permalink
The original posting is right. We got into this mess partly because of incentives pushing people who should rent to own instead. It's weird to try and get out of it by further undermining people who do the sensible thing and rent housing.
FWIW the rising defaults *are* hurting the people who own those loans, often securitized, and that's appropriate. Shareholders of countrywide and Bear Stearns have been hurt, and that is just.
But I haven't yet heard a good argument for bailing out homeowners. People who take on mortgage debt to buy property are given plenty of opportunity to contemplate what they're doing. Rental housing is available everywhere -- nobody forces you to buy a house. Plenty of us have looked at housing prices and mortgage rates in past years and said no way -- this is nuts. Now those of us who made sensible decisions are being asked to bail out people who made stupid decisions.
May 18, 2008 3:42 PM | Reply | Permalink
No one should be bailed out. Banks or homeowners.
Part of the reason why we were in a go-go mode is that the banks *assumed* they would be bailed out.
Homeowners shouldn't be bailed out either. They contributed to making prices outrageous for the rest of us. And all the homeowners were motivated for a short-cut to ownership - e.g. they were greedy. It was a bad choice to make, but I'm already footing the bill in terms of home prices, I don't want to foot it a second time in terms of my tax dollars going to a bailout.
May 18, 2008 5:45 PM | Reply | Permalink
Exactly. I decided 3 years ago that I don't make enough to afford a home, now I'm having to subsidize other people that made a wrong decision? It's BS. Not only am I getting screwed by having to pay for others mistakes but I'm keeping the price of homes artificially high so I am less likely to be able to afford one. It's such BS!
May 19, 2008 2:05 AM | Reply | Permalink
My understanding is that the bubble was created by the banks and investment firms and by real-estate investors (many just individuals and couples speculating). I agree that these don’t warrant being bailed out. But moderate and low-income families that were snookered into sub prime ARMs should be helped to keep their homes if possible. They were led to believe that they would be able to maintain payments even though that was unlikely. Why not? If the mortgage can be renegotiated into an affordable one, how is that different from all of the HUD and Fannie Mae and VHA programs to put working class families into homes?
May 18, 2008 8:49 PM | Reply | Permalink
families that were snookered...should be helped to keep their homes if possible.
But what if the snooker included that they overpaid for their shelter by a factor of, say, 25%?
Do they still want to own it? Maybe yes-especially given the serious tax preferences we give to owning over renting (a whole nother subject...)
But they may not see equity for 10 years? (albeit even Dean would admit that in the really, really long run (the kind we are all dead in) their grandkids will do quite nicely.
May 19, 2008 2:08 AM | Reply | Permalink
I think it's an absolute crock that our tax dollars are bailing out investors who made risky investments and irresponsible consumers who bought in to mortgages they couldn't afford, while the rest of us who were responsible end up looking like a bunch of shmucks for making out payments.
Yet another idiotic policy from the worst administration in the history of America.
May 19, 2008 12:26 AM | Reply | Permalink
There's a big difference between an up-front subsidy or mortgage guarantee -- the rules are clear in advance -- and bailing people out years after they sign a loan contract.
There may not be plausible reforms that promote renegotiation, though I worry about adding to the bad debt that Fannie/Freddie already hold and that taxpayers may yet be on the hook for.
I refuse to assume that low-income borrowers are idiots. (If they really are idiots, gov't shouldn't encourage them to take on debt in the first place.) Snookered? Led to believe? Who knows. People take risks and some of those risks don't work out. Asset prices are unstable. This is life.
May 19, 2008 1:48 AM | Reply | Permalink