We may be forced to save housing speculators
At its heart, the Obama plan is designed to help between seven and nine million homeowners stay in their homes. In its two-stage program, it offers low-cost refinancing to "responsible" homeowners who are hurt by falling housing prices, as well as reduced mortgage payments for three to four million "at risk" homeowners. Further, Congress is currently considering legislation that would allow judges to reduce mortgage payments for borrowers filing for bankruptcy.
While the responsible homeowner portion of the Obama plan may help salve Santelli's complaint that helping at-risk homeowners is unfair to their more responsible breathren, many feel that it misses the greater point. This perspective argues that irresponsible borrowers bought houses that they couldn't afford, largely in the hopes that rising real estate prices would guarantee their investment. This wasn't a problem when the housing boom artificially inflated home values, but these borrowers eventually became unable to maintain payments. Thus, by encouraging them to stay in their homes, the Obama plan is simultaneously rewarding bad behavior and propping up an inflated housing market.
According to the president, his plan would not help speculators or dishonest home buyers. However, an argument could be made that any homeowner who borrowed based on a belief that the housing market would continue to rise vertiginously was, in fact, a speculator. Following this train of thought, an attempt to protect the investments of such buyers institutes a "moral hazard:" by insulating borrowers from the risks inherent in their actions, the government would actually encourage irresponsible behavior, both now and in the future.
The difficulty, of course, is that both sides of this argument have merit. While insulating irresponsible borrowers seems morally wrong and socially unwise, a failure to do so will cause a significant drop in market value. In fact, as Lita Epstein recently noted, housing prices fell over 18% in 2008. This hurts both responsible and irresponsible borrowers, as well as the economy.
On the other hand, insulating homeowners from fluctuations in the market will disadvantage responsible borrowers who, similarly shielded from the market, may have chosen to buy bigger houses. Worse yet, responsible renters who avoided mortgages that they couldn't afford will, essentially, be paying to support those who didn't. In the process, the renters will also be propping up inflated housing values, making it harder for them to eventually become homeowners.
In a recent issue of The Atlantic, urban studies theorist Richard Florida offered a solution that may end up benefiting all three groups. He proposed that the government could encourage banks to rent out foreclosed properties to their current occupants. This would reduce the borrowers' monthly housing payments, keep the properties occupied, and help stabilize the market. Furthermore, it would encourage renting, which increases worker mobility, a key problem, as home ownership has kept many workers in areas where they cannot find jobs.
Florida's suggestion certainly has its flaws, not least of which lies in the fact that banks are generally uninterested in becoming landlords. However, it certainly offers food for thought. While it will be impossible to please all parties involved in the current housing crisis, a solution that keeps people in homes, neighborhoods intact, and real estate prices out of the gutter certainly deserves a little consideration.