Purely a Coincidence, I'm Sure....

I just noticed that my bank has reduced the borrowing limit on my HELOC to about half what it was when I opened the line of credit two years ago. They've given themselves a considerable equity buffer above my maximum mortgage + maximum home equity borrowing, even as compared to the lowest priced houses in the neighborhood. (For the record, it's a modest 1950's subdivision where, to people who don't live here, "all the houses look alike" - and to the rest of us they look very similar.)

This doesn't really affect me, as I'm a conservative borrower, but I'm in a neighborhood where home values seem pretty stable and I have a credit rating that usually has banks lining up to try to loan me money.

Home Ownership

Paul Krugman convincingly argues that the glories of home ownership are overstated, but I think he overstates his own case.

Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner. “If you own something,” Mr. Bush once declared, “you have a vital stake in the future of our country.”

Krugman correctly notes that home ownership carries financial risk (made all the more clear by the bursting of the "housing bubble"), ties people down, and increases commuting costs. On the second issue, I would respond that many of the costs and complexity of moving - real estate agent commissions, title insurance, transferring title, etc. - are unnecessarily inflated and could be significantly reduced with some common sense reforms of how property is titled and transferred.

But despite the risk, under the traditional model of a down payment and the use of home equity loans for home improvement as opposed to discretionary spending, owning a home is very likely to result in the long-term accumulation of wealth. It also helps create community - sure, you're tied down, but you're much more likely to take care of your own home than your rental property, and that benefits your other "tied down" neighbors. Consider what often happens to housing values when there are "too many rentals" in a neighborhood.

At the same time, we should not overlook the tax burdens created by suburbanization, which raises not only the costs of commuting but also requires substantial infrastructure costs - roads, highways, emergency services, extending utilities, etc. - to be largely borne by other taxpayers. When most people own homes, that cost arguably is spread around such that it may not seem unfair, but it's a substantial cost and is largely invisible. There's a big something to be said for encouraging people to live in existing urban centers instead of building new suburbs.

There probably is a population for which the "American dream" of owning a home overshadows a realistic appraisal of whether home ownership is a good idea for them. Do they have a sufficient, stable income to afford a home - including upkeep and commuting costs? Will they be moving soon or frequently, or should they expect to? Do they understand and wish to assume the responsibilities of home ownership, or would they be better of renting (or buying a condo)? The solution there is education.

Bush On The Mortgage Mess

Bush plans to veto the proposed "housing-relief bill", expressing,

The president on Wednesday repeated his opposition to a bill “that will reward speculators and lenders” who have suffered because of their own foolishness.

If that's truly the way he feels, he should be advocating for changes in bankruptcy law that would permit lenders and borrowers to share the cost of their folly through first mortgage cramdowns in bankruptcy court. But of course, he doesn't actually favor that - he seems to instead favor "solutions" which direct taxpayer money to lenders but not to borrowers.

Housing Handouts

Pretty much everybody and his brother has published an editorial describing one stimulus or another for the housing market. A minority prefer to leave things alone. George Will, on the other hand, takes a middle road, apparently clinging to his belief that a handout is only a handout when it is made to an individual and not a corporation.

Oh? The idea that protracted golden years of idleness are a universal right is a delusion of recent vintage. Deranged by the entitlement mentality fostered by a metastasizing welfare state, Americans now have such low pain thresholds that suffering is defined as a slight delay in beginning a subsidized retirement often lasting one-third of the retiree's adult lifetime.

You know, for a guy who looks like he has never engaged in physical labor in his entire lifetime, Will should give it a try. He's only 67 years old - let's see how well he does when he's pushing something heavier than a pen, for something closer to minimum wage than his sinecures at The Washington Post and Newsweek.

Subprime mortgages are a small minority of mortgages, and only a minority of subprime borrowers are not making their payments. Casting this minority of a minority as victims of "predatory" lending fits the liberal narrative that most Americans are victims of this or that sinister elite or impersonal force and are not competent to cope with life's complexities without government supervision.

This represents Will at his best - half right. I agree with him that most of the people who are in trouble made poor individual choices. But that does not mean that there were no predatory practices by lenders, and it certainly doesn't justify Will's willful blindness toward the massive federal handouts being given to lenders who were much better positioned than any individual to recognize the folly of these loans - yet made them time, and time, and time again. As is his wont, Will also has to wrap his point in a silly smear against "liberals". (But perhaps he's now among those who think of John McCain and G.W. Bush as liberals, so who even knows what that means at this point.)

But I agree with this point, despite its condescension:

The 96 percent of mortgage borrowers who are fulfilling their commitments, often by scrimping, may be grumpy bystanders if many of the other 4 percent - those who found the phrase "variable rate" impenetrably mysterious - are eligible for ameliorations of their obligations.

The proposed "remedies" to the "foreclosure crisis" seem to be taking the form of handouts - either bailing out borrowers who are in over their heads, or subsidizing new home buyers to try to soak up some of the "excess inventory" in the housing market. Picking up where Will left off, David Ignatius presents a "slippery slope" (i.e., logically fallacious) argument as to where this all leads us.

We're now in a comparable cycle of bestowing special economic favors on members of the national family who have been hurt by the credit market crisis. "It's not fair," argue the housing interests and consumer advocacy groups. "Bear Stearns got a financial bailout, so why shouldn't we?" And they're right, by the simplest schoolyard definition of fairness.

So the line grows of people demanding breaks on financial obligations they can't afford. Last week, the Bush administration agreed to rescue 100,000 homeowners who are at risk of foreclosure on their mortgages. Congressional Democrats promptly announced that this wasn't fair enough and that they intended to expand the bailout to as many as 2 million distressed borrowers.

But why stop there? What about onerous commercial mortgages? And credit card debt? And student loans? Why should anyone have to pay back anything? It's not fair

Well, actually, we do have a mechanism where businesses and individuals can escape debts. It's enshrined in the body of the Constitution. It's called... bankruptcy. With some relatively modest tweaking of bankruptcy law, borrowers facing foreclosure can get individualized relief through the bankruptcy courts. The lenders who chose to give them too much money will take a loss, sure, but often less than the cost of a foreclosure. And there is no need for federal handouts to the borrowers.

As for those handouts, some of them inspire the "Say what?" response....

The only solution is for the federal government to offer a temporary 5 percent tax rebate — up to $25,000 — for first-time home buyers.

Here's where the point made by Ignatius and Will kicks in - that proposal is manifestly unfair to responsible borrowers, including first-time home buyers who may have lost part or all of their equity after buying houses they can afford. It also assumes that the problem exists at the bottom of the market. While I don't dispute that there seem to be many areas where foreclosures are affecting large numbers of entry level homes, there are also many areas where even with a subsidy the homes affected are out of the reach of first-time buyers.

I guess the idea is that making homeowners out of a population that has insufficient savings or interest in presently becoming homeowners will reinflate the bubble, such that other owners "get their equity back". But if that works, does it do more than postpone the present market correction? And don't we risk creating a new population of home buyers who don't have the financial stability or discipline to consistently pay their mortgages, setting ourselves up for "foreclosure crisis II"? There's a reason, after all, that lenders traditionally chose not to give mortgages to first-time borrowers who hadn't saved up a down payment, even if somebody else was willing to give them the money. Also, while the subsidy may inspire renters to buy homes, what happens to the vacant rental properties? Higher vacancies usually lead to lower rent, and rental rates typically correlate to housing values.

Meanwhile it does appear that there are individuals and investors who are bargain hunting, raising the question of whether such a subsidy at the bottom end of the market is even necessary.

Who Should Get The Taxpayers' Money

In flattering McCain (who Will still appears to detest), George Will presents a false dichotomy, pretending McCain supports a solution to the "economy's housing-related credit woes" that doesn't involve any bail-outs whatsoever. Quoting McCain, Will writes:

He says "it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers." For now, he is with Senate Republicans in opposing the Democrats' proposal to empower judges to rewrite the terms of some mortgages, an idea that strikes at the sanctity of contracts and hence at the ethic of promise-keeping that is fundamental to social life. He opposes an additional dose of the toxin that has made the credit system sick -- he favors strengthening rather than weakening down-payment requirements for loans backed by the Federal Housing Administration. And he has admirably avoided the rhetoric of victimology, such as that used when The Post editorialized that "lenders pushed tens of billions of dollars in potentially high-interest mortgage debt on people ill-equipped to handle it."

So the honest translation would be that McCain opposes only aid directed at borrowers. While he wants stronger guarantees that federal loans will be repaid, something that to me is a perfectly reasonable demand, he has not actually opposed bail-outs of financial institutions. He just wants to add a few more strings to the bail-out packages they receive.

The honest question this might raise is, why support bail-outs of those who were in the best position to prevent this from happening in the first place, while providing no benefit at all to those (whatever you think of their culpability) on the other side of the loan? If Will were to think about it, he would recognize that offering bankruptcy relief to those borrowers wouldn't let them avoid their loans - it would allow them to discount their loans to the present market value of their homes. The borrowers would have their creditworthiness severely downgraded for a decade. But the owners of the loans, not the taxpayers, would have to absorb the difference. That, it seems, is unacceptable to either George Will or John McCain.

I'm not going to benefit from the bailouts - If I even own stock in any of the financial institutions involved, it's part of a mutual fund. And I'm the opposite of the sort who purchases "more home than I can afford" than maxes out my HELOC. As a conservative borrower and spender, who believes in paying my bills in full, I am hardly brimming with sympathy for those who chose to believe promises that were plainly too good to be true. Yet if my choice is between having my tax money used for a bailout, or having irresponsible lenders take a loss due to the bankruptcies of their irresponsible borrowers? I'll support the bankruptcy reform, thank you very much.