- The Washington Times - Monday, March 24, 2008

ANALYSIS/OPINION:

In the quest to quell the mortgage debacle this country now finds itself faced with, the Bush administration has made some notable adjustments to the market with its economic stimulus package.

Part of the administration’s compromise with Congress was to temporarily raise the loan limits that government-supported Fannie Mae and Freddie Mac can back up. In areas like Washington, Boston and Los Angeles, that means upping the limit government will guarantee on home loans from $417,000 to $729,000. The administration’s hope is that current homeowners will refinance and infuse cash back into the market. This is similar to what President Bush did with the 2001 tax cuts to ward off an impending recession and encourage Americans to keep buying, spending and getting on with the business of living. But that consumer exuberance may be biting back.

Most conservative economists don’t see a real “crisis”; they suspect the market is responding to consumer overexuberance. George Mason University professor and economist Walter E. Williams, who called the government’s Bear Stearns bailout “offensive,” characterized the housing dilemma as “a government which created the problem by allowing banks to back bad loans — and is now mistakenly trying to fix it.” Mr. Williams told us that the government’s attempt to fix this most recent economic mess is a “bad idea that will only lead to similar problems in the future.”

But Housing and Urban Development Secretary Alphonso Jackson, in a meeting last week with editors and reporters at The Washington Times, proposed that the administration do more to ensure that consumers are more responsible. Mr. Jackson would like to see the temporary maximum loan limit made permanent. He says that reverting back to the $417,000 is unfair to homebuyers (such as teachers and police officers) whose median incomes don’t match the housing market they’re living in along the East and West coasts.

What’s not fair, Mr. Williams says, is consumers (and lenders) who get themselves in trouble and want the government to bail them out. And we agree, to a degree. Some help is needed and necessary, but making the $729,000 maximum permanent is in direct contrast to what the administration itself has argued. It’s also neither economically prudent nor responsible.

As part of its efforts to get FHA modernization passed in Congress, HUD has included what’s known as the RESPA rule to help borrowers better understand what they are getting into as soon as they walk in the door. It would require all lenders to present potential homebuyers with one simplified, universal “good faith estimate” form. It’s two easy-to-read pages, and it spells out the terms, loan rates, payment and settlement costs before consumers fork over a dime. We do think that’s smart.

Mr. Williams also concedes that doom-and-gloom alarmists are just as counterproductive to the process of recovery. He argues that “the sky is falling,” “homeownership” is plummeting mentality is just as off-base as more government entanglement. The fact is that 96 percent of homeowners still pay their mortgages on time and have not defaulted.

Of the 3 percent to 4 percent of defaults or foreclosures, half of those are investors and bad credit risks who should have never been given a loan in the first place. The latter will not (and should not) be bailed out by the government. And the majority of Americans still own their homes. While the homeownership rate has dropped a mere 0.3 since its peak four years ago (maybe because more people are coming to the realization that they actually do need to save more before buying a home), it remains steady at around 67.8 percent — still higher than the rate inherited from President Clinton in 2000.

One can Monday-morning quarterback all day long about whether the administration “should have” recognized this problem months ago, and about how consumers should be more responsible and predatory lenders need to be cast back under the rock from which they came. We’re sure that’s all true. But “shoulda, coulda, woulda” never solved any problem. The focus needs to be on what’s working now and what will work in the short and long term. One thing is for sure: The more the government “helps,” the more there will be strings attached. Economists tell us that these “crises” are cyclical; if history repeats, the economy will correct itself.

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