Housing Bailout Déjà Vu

Secretary of Housing and Urban Development Shaun Donovan on "Face The Nation," Feb. 22, 2009.
This column was written by Phil Kerpen.

Congress is poised to hand the Obama administration a housing-bailout bill that looks eerily like the ineffective one passed last year. Before that happens, we might want to ask Fannie and Freddie what happened to the first $200 billion we gave them.

Last year's bill included what then-Treasury Secretary Henry Paulson called a "bazooka," an extreme option that would inspire so much confidence it wouldn't have to be used. Yet once the bill passed, the government promptly employed this option, injecting $200 billion from the Treasury into Fannie Mae and Freddie Mac - the government-sponsored enterprises (GSEs) at the center of the housing bubble.

And this week, Tim Geithner doubled down: He stated that he and the president are going to throw another $200 billion at the GSEs. So that makes $400 billion for Fannie Mae and Freddie Mac, behemoths that should be wound down, not expanded.

The other major element of the Geithner/Obama plan is $75 billion in taxpayer subsidies to, in effect, make mortgage payments for people who bought properties they can't afford. This is a variation on a theme from the Paulson/Bush original that provided Federal Housing Administration (FHA) insurance - at a cost of $100 billion - as an inducement for banks to write down mortgages.

The more than 90 percent of homeowners who pay their mortgages on time - not to mention renters, and all taxpayers for that matter - are rightly skeptical of being forced to foot the bill for these subsidies. And it's very unlikely that these schemes will even help the small minority of people facing foreclosure.

Various efforts to save homeowners from foreclosure - programs enacted under last year's bill, FDIC initiatives, and voluntary bank actions - are already witnessing high rates of re-foreclosure. The Congressional Budget Office estimates that through the Bush program, the FHA will receive 400,000 revised mortgages to insure through 2010, and that even in a best-case scenario, 140,000 of these mortgages will enter foreclosure a second time in the program's first three years.

We are throwing good money after bad, keeping people temporarily in homes they can't pay for, and preventing prices from falling to levels where young people and first-time homebuyers can affordably enter the market.

We hear, of course, that the housing bailout is necessary because homeowners are "under water," which means their houses are worth less than the amounts they still owe on their mortgages. But this should be irrelevant to people who intend to live in their homes, and best applies to those who purchased properties in the heyday of the housing bubble in the hopes of getting rich quick. Unless you're selling, it doesn't matter what the market price is. You either can afford the payments you signed up for when you bought your house, or you cannot.

And in what's becoming routine for the new administration, the new plan takes the old one a step further: The latest housing bailout includes provisions previously rejected by Congress to allow bankruptcy judges to tear up existing mortgage contracts and impose their own. This destroys the basic idea that contracts create legal rights that must be respected. And by introducing more uncertainty into the market, these provisions will result in higher interest rates and fewer banks willing to lend.

This latest housing rescue, like other bailouts and stimuli, is a futile attempt to re-inflate a bubble by borrowing more money that we can't afford to pay back. And the stakes grow ever higher as mounting bailouts threaten to bankrupt the country.

A much better idea would be to let those who can't pay their mortgages go to foreclosure - it's not much of a tragedy when a homeowner again becomes a renter - and let those who wisely sat out the housing bubble step in and buy homes they actually can afford.

Phil Kerpen is policy director for Americans for Prosperity.
By Phil Kerpen
Reprinted with permission from National Review Online