OAKLAND, Calif., Feb. 24, 2009Last week, President Obama unveiled a controversial plan intended to “ease” the housing crisis. But $275 billion coupled with nine million “opportunities to refinance,” is an inadequate formula says Independent Institute Research Fellow Stan Liebowitz. In fact, Liebowitz and other leading economists contend that the government’s involvement in the housing market was a driving force in the 2008 bubble and subsequent collapse.
In his recent policy report, Anatomy of a Train Wreck: Causes of the Mortgage Meltdown, Liebowitz, a professor of economics at the University of Texas, revealed that the federal government’s long-standing erosion of underwriting standards was a misguided, politically-motivated attempt to increase homeownership in the purported goal of assisting minorities and the less affluent.
Prior to this weakening of underwriting standards, homeownership had been stagnant in the U.S. for several decades, wrote Liebowitz. Though seemingly noble for the government to stimulate new ownership, “the tool chosen to achieve this goal was one that endangered the entire mortgage enterprise.” The foreclosure crisis, which has led to our economic distress, was a direct consequence of authorizing these bad loans.
Liebowitz now argues that Obama’s recent recommendation to lower mortgage rates is a continuation of an ill-advised idea inherited from the Bush Administration. The plan increases the frequency of refinancing while doing little to stop the decline in home prices.
If creditworthy homeowners were permitted to refinance, the artificially lower interest rates would just be typical government giveaways. It would become much more expensive, however, if extended to homeowners with substandard credit. The increased interest rates normally given to high-risk borrowers to compensate for their greater delinquencies would be replaced by low rates. Taxpayers would be forced to cover any of the now extra-heavily subsidized loans that went bad.
Offering lower rates through refinancing to “underwater” homeowners, or those whose houses are worth less than their mortgage amounts, is a sound strategy consistent with an attempt to allow homeowners to refinance. But, as Liebowitz continues, the government may provide these low interest loans to borrowers with weak credit histories in addition to otherwise credit-worthy homeowners whose homes happen to be under water. Again, this would exponentially increase the costs of this program to taxpayers.
The most dangerous component of the plan is helping homeowners classified as “at risk.” In reality, these are high-risk borrowers, each of whom, as the plan states according to the figures in the plan, would cost taxpayers $21,000 to be bailed out. Mortgage lenders will be instructed to shoulder an equally large amount for each of these borrowers as their mortgage interest rates are adjusted downward. When these individual homeowners are given loans with interest rates as low as 2 percent, including those who have not even defaulted on their mortgages, the market is turned on its head.
Normally, the most credit-worthy applicants merit the lowest mortgage interest rates. Now the lowest rates will go to the least credit-worthy. Furthermore, housing speculators and people who were dishonest about their income will qualify for these low interest loans, contrary to the plan’s claims.
Liebowitz concludes, “No attempt is being made to ask for payback from those being bailedout. Politicians would never allow the perception that they were just giving a handout to corporations. Why should homeowners have money given to them when it would be so easy to have them make recompense to the taxpayers in future years if they make money on their house purchases?”
Liebowitz is available for interviews. To read the policy report, please see:
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