A mixed fix
Lawmakers returned to Washington this week determined to address the home-loan fiasco that has dragged down the economy. The Senate quickly fashioned a bipartisan, $14.9-billion package of tax breaks and grants aimed largely at home builders and buyers. These moves might help boost some segments of the housing market, but they won’t do much about the problem most in need of a federal response: the growing ranks of defaulting borrowers and repossessed homes.
The tax breaks in the Senate bill would help home builders that profited handsomely during the boom. They would also prop up the price of foreclosed properties with $7,000 subsidies for the purchase of those homes. But the goal isn’t to stop the boom-and-bust cycle from running its course or causing losses. It’s to prevent the bust from being so sudden and severe that it chokes off credit, stifles consumer spending and wrecks the economy. That means helping lenders regain the capacity and willingness to lend, as well as warding off a tidal wave of foreclosures that could cause the economies in hard-hit communities to founder.
The Federal Reserve’s recent moves have helped, but it can only do so much. The rapid drop in property values could still prompt a huge number of recent borrowers to lose or walk away from their homes. Although only some of those borrowers may seem deserving -- the first-time home buyers trapped in unaffordable loans by predatory lenders -- it’s in everyone’s interests to keep borrowers out of foreclosure if they can afford their houses on reasonable terms. Lenders recognize this and have started to write down loan values and reduce interest rates closer to what prime borrowers pay, steps that cost less in the long run than foreclosing and reselling at a steep loss. They’re just not moving fast enough. Congress could give mortgage servicing companies more incentive to modify loans for borrowers with little or no equity in their homes, but the Senate bill punts on this issue.
A more welcome element of the bill, at least in theory, is the $4 billion it would provide community groups to buy repossessed properties and convert them into affordable housing. The catch is to provide effective oversight, which has been a weak point in the Community Development Block Grant program. With the right safeguards, though, the proposal could accomplish two things at once: increasing affordable housing on the cheap and combating the blight caused by houses left vacant by foreclosure.
